Contractor life insurance ensures that your family are looked after, no matter what might befall you, in or out of work. Here, we’ll take you through an overview of what you should be looking for in a life insurance policy.Get A Quote
Why should I take out a life insurance policy?
If you provide all or part of your family’s income, it becomes important to protect them in the event of your untimely death. Typically, a life insurance policy will pay out in much the same way that a death-in-service clause might work for a permanent employee. It is unlikely that your grieving family will able to easily absorb the shortfall if they lose you and your income, so for relatively little effort, you can safeguard them during a very difficult period. If you are divorced or separated but have children, it may be that you are legally required to take out life insurance until your children become adults.Get A Quote
Frequently Asked Questions
What types of policy are available?
There are two chief genres of life insurance policy and they’re defined by the amount of time a policy is active.
The first type of policy is Term Cover – a fixed term arrangement. This means that there is a designated endpoint to the coverage, as designated by the contactor and their insurer. If the contractor should die after the coverage period has finished, there will be no remuneration for their family.
The second type is Whole of Life Cover, which is just as it sounds. This policy will never expire as long as the insurance payments are kept up. This is a much more expensive option than Term Cover but obviously much less risky as it guarantees an eventual payout.
What are my life insurance options?
There are three main types of life insurance available to contractors: relevant life insurance cover, mortgage-related life cover and additional lump sum payments.
What is an index linked policy?
An index linked insurance policy is one that reflects the economy at the time it is cashed out. Insurers can do this by increasing premiums by a specific amount year-on-year so that the available pot grows with the passage of time.
What can affect my life insurance cover?
Insurers look at the state of your physical health before they agree to take you on as a policyholder. If your health or lifestyle makes you look like an obvious risk, the premiums will be much higher. If you’re worried that something might affect your insurance premiums, it would be wise to talk to a financial advisor who specialises in contractor issues, so they can help you work out what kind of policy would work best for you.
What is Relevant Life Insurance (RLP)?
This is the type of insurance that takes into account a contractor’s earnings and then gives out multiple payments based on their total earning power. It must be instigated through the contractor’s limited company.
Relevant life insurance policies are structured like a discretionary trust, which means that there are no designated beneficiaries of the money. Appointed trustees then structure the payment of funds in the manner of their choosing which determines when your family would receive the money. That the money is not paid directly to the beneficiaries is the main reason that this money circumvents any inheritance taxation.
Taking out a relevant life insurance policy is hugely tax efficient. This is because the cost of RLP can be deducted as a legitimate business expense from the company’s corporation tax. This means that you benefit from a tax saving every time you pay your insurance premium.
In addition, RLP does not count as part of your lifetime pension allowance, so it will not contribute to your capped total that you’re allowed to save tax-free.
HMRC regards life insurance as a legitimate business expense which means the payments do not attract an additional benefit in kind tax, which would have to be paid from your family’s income. This also means you do not have to include the expense on your annual P11D form.
The maximum amount of coverage allowed for this type of policy is fixed but it is set at 15 times your total income, including wages, dividends and other benefits.
Relevant life insurance is also extremely flexible. If you choose to become a permanent employee again, you can switch up the method of payment and continue to maintain your policy out of your net income. However, this type of policy has no surrender value, which means that if you stop payment, the coverage will simply stop and the premium will not pay out if cancelled early. So keep your payments going!
What is Mortgage-Related Life Insurance?
Also known as a Decreasing Term Assurance Plan, a contractor must take this kind of life insurance personally, ie, not through their limited company, as it would incur benefit in kind tax. This type of insurance is explicitly tied to the paying off of the contractor’s personal mortgage and if the contractor should die before they managed to pay the balance on their home, this insurance would kick in and release a lump sum that would cover the remaining total owed on the house.
This is a good type of insurance to go for if you want to economise as the premiums get less expensive the more you pay off the mortgage.
What is a Level Term Assurance Plan?
These are small, individual policies that are designed either to release lump sums of cash or to act as a regular payment to the deceased’s family. This type of policy is really only effective if not too much time passes between the policy being taken out and the contractor’s death. This is simply because the value of money decreases over time – £10,000 would buy you a lot more in 1988 than it would in 2018. This precipitous drop in value can be avoided if you link index your policy
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