Death in service benefit is a common perk for directors and management in permanent positions, however, contractors will need to seek out their own version of this through relevant life insurance.
This type of life insurance policy is paid for by the 'employer', or limited company in the case of the contractor, and is particularly useful for the tax benefits that come with it.
Let's take a closer look at relevant life insurance for contractors and how it can benefit you and your family.
What is relevant life insurance?
Relevant life insurance works in almost exactly the same way as a traditional life insurance policy in that you'll be insured for a fixed lump sum over a pre-determined number of years. This amount will payout should you pass away during the term or be diagnosed with a terminal illness giving you 12 months or less to live.
Unlike a typical life insurance policy that requires you to pay monthly premiums, relevant life insurance policies are owned and paid for by the limited company. In practice, this means that contractors can pay for their life insurance policy through their limited company as a valid business expense.
If you're setting up your own relevant life insurance policy through a limited company, you'll need to decide if you want the amount of cover to remain the same (level term life insurance) or increase in line with the Retail Price Index (RPI) – known as index linking.
If you choose to index-link your relevant life insurance plan, the amount of cover you have will increase by a percentage of your choosing or by RPI. This is a great way to overcome the devaluation of your insurance amount over time.
For example, a policy for £100,000 taken out in 1990 would have lost almost half of its real-world value by 2019, whereas had it been set to increase by 2% per year, it would be worth more than £178,000 over the same period.
Does relevant life insurance include critical illness cover?
Although critical illness doesn't come with relevant life insurance as standard, it can easily be added on should you wish to include this benefit.
Critical illness insurance will pay out a fixed lump sum should you be diagnosed with a specified illness during the term of your policy. For more information on what's covered, take a look at our critical insurance for contractors page.
Who does the relevant insurance policy payout to?
Although your employer or limited company owns your life insurance policy, the plan should be written into 'trust' to ensure that the payout is made to you or your family rather than the business.
Think of a trust as a type of will for your life insurance policy that directs the beneficiaries. The named beneficiaries can be changed whilst the policy is running by setting up a new trust.
For more information on relevant life policies or to get a personalised quotation, contact a member of our team today and we'll be more than happy to assist.
