Life Insurance for Limited Companies UK

As a company director in the UK, you wear many hats. You're a strategist, a leader, a salesperson, and often, the driving force behind your business's success. This relentless dedication builds value for your company, but have you considered how to protect the most important asset of all – yourself and your family – in the most tax-efficient way possible?

Many directors automatically turn to personal life insurance, paying for it from their post-tax income. However, for those running a limited company, there's a far smarter, more cost-effective solution hiding in plain sight: Relevant Life Insurance.

This comprehensive guide will unpack everything you need to know about life insurance for limited companies. We'll explore how directors can leverage Relevant Life Plans to secure significant tax savings, protect their loved ones, and integrate this cover into a robust financial plan. We will also touch upon other critical protection policies that every business owner should consider.

How directors can take advantage of relevant life plans

For too long, generous 'death-in-service' benefits were seen as the exclusive perk of large corporations. Smaller businesses and their directors often missed out, forced to arrange personal cover at a much higher net cost. The introduction of Relevant Life Plans (RLPs) changed the game entirely.

An RLP is essentially a company-paid 'death-in-service' policy for an individual employee or director. The limited company pays the monthly premiums, but the policy is designed to pay a tax-free lump sum directly to the director's family or chosen beneficiaries upon their death.

The primary advantage lies in its remarkable tax efficiency. By structuring your life insurance this way, you can unlock substantial savings for both your company and yourself personally. It's a financial strategy that turns a personal expense into a legitimate, tax-deductible business expense.

Imagine providing your family with hundreds of thousands, or even millions, of pounds of life cover without paying a single penny from your own taxed bank account. That is the power of a Relevant Life Plan.

What is a Relevant Life Plan? A Deep Dive

At its core, a Relevant Life Plan is a term life insurance policy. It pays out a lump sum if the person insured dies within the policy term. The key difference lies in who owns and pays for the policy.

• Owner & Payer: The limited company.
• Person Insured: An employee or salaried director.
• Beneficiaries: The family or nominated individuals of the insured person.

Unlike a typical life insurance policy where the payout might form part of your estate for Inheritance Tax (IHT) purposes, an RLP is always written into a discretionary trust from the very beginning.

Why is the Trust so Important?

The trust is the legal framework that makes the whole structure work.

1. Separates the Money: It ensures the payout from the insurer is made to the trust, not to the company or the individual's estate.
2. Avoids Inheritance Tax: Because the money is held in the trust, it falls outside the deceased's estate and is therefore not subject to the 40% Inheritance Tax. This can save your family a fortune.
3. Ensures Quick Payout: The trustees (who you appoint) can distribute the funds to your beneficiaries quickly, without waiting for the lengthy process of probate.

A Relevant Life Plan is designed for small and medium-sized enterprises (SMEs) that don't have enough eligible employees to set up a full Group Life Insurance scheme. It allows them to offer competitive benefits and attract and retain top talent, including themselves.

The Unbeatable Tax Advantages of Relevant Life Cover

This is where Relevant Life Plans truly shine and offer a compelling reason for every eligible director to consider one. The savings are multi-layered, benefiting both the business and the individual. Let's break it down.

Benefits for the Limited Company:

• Corporation Tax Relief: The monthly premiums are typically treated as an allowable business expense by HMRC. This means you can deduct the full cost of the premiums from your company's profits, reducing your Corporation Tax bill.
• No National Insurance: The company does not pay Employer's National Insurance contributions on the premiums.

Benefits for the Director/Employee:

• No Income Tax: The premiums are not considered a P11D benefit-in-kind. This is a huge advantage. Normally, if your company pays for a personal benefit (like a gym membership or private medical insurance), you have to pay income tax on the value of that benefit. With an RLP, you don't.
• No National Insurance: You do not pay any Employee's National Insurance contributions on the premiums.
• Inheritance Tax-Free Payout: As the policy is held in a trust, the lump sum payout goes directly to your beneficiaries and is not assessed for Inheritance Tax.

Real-World Example: The Financial Impact

Let's compare the cost of a director funding their own personal life insurance versus having the company pay for a Relevant Life Plan.

Assume:

• Director: A 40-year-old, non-smoker.
• Salary: £60,000 per year (Higher Rate taxpayer at 40%).
• Required Cover: £600,000 lump sum.
• Life Insurance Premium: £50 per month (£600 per year).
• Corporation Tax Rate: 25% (the main rate from April 2023).

Here is a comparison of the true cost:

As the table clearly shows, using a Relevant Life Plan in this scenario results in a saving of £550 every single year. Over a 25-year term, that's a total saving of £13,750. For higher premiums or for individuals in the 45% Additional Rate tax bracket, the savings are even more dramatic.

This isn't a loophole; it's a legitimate, HMRC-accepted way for businesses to provide crucial financial protection for their people.

Who is Eligible for a Relevant Life Plan?

While incredibly beneficial, Relevant Life Plans are not for everyone. HMRC has specific rules about who can be covered.

You are generally ELIGIBLE if:

• You are an employee of a UK-based business, which includes salaried directors.
• Your limited company pays you a salary via PAYE.
• You have a contract of employment.

You are generally NOT ELIGIBLE if:

• You are a sole trader.
• You are an equity partner in a Partnership or a member of a Limited Liability Partnership (LLP).
• You are a non-salaried director or your remuneration is solely from dividends. You must be taking a salary.
• The business is not trading for profit (e.g., a charity or non-profit might not qualify).

The key distinction is the "employer-employee" relationship. A Relevant Life Plan must be established "wholly and exclusively" for the purpose of trade, providing benefits for the employee and their family, not just as a tax avoidance scheme for the business owner. For most directors of genuine trading companies, this test is easily met.

If you are unsure of your eligibility, speaking to a specialist insurance broker is essential. Here at WeCovr, we can quickly assess your circumstances and confirm if a Relevant Life Plan is the right fit for you and your company.

Setting Up a Relevant Life Plan: A Step-by-Step Guide

The process of setting up a Relevant Life Plan is more straightforward than you might think, especially with expert guidance.

Step 1: Determine Your Level of Cover

The first question is always: "How much cover do I need?" The goal is to provide a financial cushion for your family to maintain their lifestyle if you were no longer around. A common method is to use a multiple of your total annual remuneration (salary plus dividends).

• Typical Multiples: Insurers will generally offer cover up to 15-25 times your total remuneration. For example, if your salary is £50,000 and you take £40,000 in dividends (£90,000 total), you could potentially get cover of up to £2.25 million.
• Consider Your Needs: Think about outstanding debts (mortgage), ongoing living costs for your family, and future expenses like university fees for your children.

Step 2: Get Quotes and Compare the Market

It's crucial not to simply go with the first provider you find. The life insurance market is competitive, and premiums can vary significantly between insurers.

This is where a specialist broker like WeCovr adds immense value. We use our expertise and technology to compare policies from all the major UK insurers, ensuring you get the most comprehensive cover at the best possible price for your company. We handle the paperwork and translate the jargon, making the process seamless.

Step 3: The Application Process

Once you've chosen an insurer, you'll need to complete an application form. Be prepared to provide:

• Personal Details: Name, date of birth, address.
• Health & Lifestyle Information: You will be asked questions about your medical history, your family's medical history, your smoking status, alcohol consumption, and any high-risk hobbies. Honesty is paramount here; failing to disclose information could invalidate a future claim.
• Business Details: Information about your limited company.
• Financial Details: Your salary and dividend income to justify the level of cover.

In some cases, especially for larger cover amounts or if you have pre-existing health conditions, the insurer may request a medical screening, a GP report, or a nurse medical. This is a standard part of the underwriting process.

Step 4: Setting Up the Discretionary Trust

This is a non-negotiable step. The policy must be placed into a discretionary trust at the outset. The insurance provider will supply the necessary trust forms as part of the application pack.

• You (the director) will be the "Settlor" - the person creating the trust.
• You will appoint "Trustees" - these are the people you trust to manage the policy and distribute the payout according to your wishes. It's common to appoint your spouse, adult children, or a professional like a solicitor. You can also be a trustee yourself.
• You will name "Beneficiaries" - these are the people you want to receive the money (e.g., your spouse, civil partner, children).

The process is typically straightforward, involving filling out a form and having it signed. Your broker will guide you through this to ensure it's completed correctly.

Relevant Life Plans vs. Personal Life Insurance vs. Group Life Schemes

Understanding the differences between the main types of life cover is key to making an informed decision.

In short, a Relevant Life Plan offers the tax advantages of a Group Life scheme but on an individual basis, making it the perfect solution for directors and key employees of SMEs.

Beyond Relevant Life: Other Essential Protection for Company Directors

A Relevant Life Plan is a fantastic tool for protecting your family, but protecting your business is equally important. As a director, your value extends beyond your personal life; your absence could have a devastating financial impact on the company you've built.

Here are other tax-efficient, company-paid insurance policies to consider:

Key Person Insurance

What would happen to your business if you, or another crucial member of your team, were to die or become seriously ill? Could the business survive the loss of revenue, the disruption, or the cost of finding a replacement?

• What it is: A life and/or critical illness policy taken out by the company on a 'key' individual.
• How it works: If the key person dies or is diagnosed with a specified critical illness, the policy pays a lump sum to the company.
• What it covers: The funds can be used to cover lost profits, recruit a replacement, repay business loans, or simply provide a cash injection to reassure lenders and suppliers during a difficult period.
• Tax Treatment: Premiums are often a tax-deductible expense if the policy is purely to cover a loss of profits (the rules can be complex, so advice is essential).

According to a 2022 survey by Legal & General, 51% of businesses said they would cease trading within a year if they lost a key person. This highlights the critical need for this type of protection.

Shareholder Protection Insurance

If you run a business with one or more other director-shareholders, have you considered what would happen if one of you were to die?

Without a formal agreement, the deceased's shares would pass to their beneficiaries via their will. This could mean your new business partner is their spouse or child, who may have no interest or experience in running the company. They might want to sell the shares, but to whom? Or they might want to be involved, leading to potential conflict and paralysis.

• What it is: A combination of life insurance policies and a legal agreement. Each shareholder takes out a life policy on the other shareholders, often written in trust.
• How it works: On the death of a shareholder, the policy pays out to the surviving shareholders. This provides them with the cash to buy the deceased's shares from their estate at a pre-agreed price.
• The Result: The surviving shareholders retain full control of the business, and the deceased's family receives fair market value for their shares in cash. It's a clean and fair solution for everyone.

Executive Income Protection

While a Relevant Life Plan covers death, what about long-term illness or injury? Statutory Sick Pay is minimal, and as a director, a prolonged absence could mean your income stops entirely.

• What it is: An income protection policy paid for by the limited company, for the benefit of a director or employee.
• How it works: If you are unable to work due to illness or injury, the policy pays a regular monthly income to the company. The company then pays this to you as salary via PAYE.
• Tax Treatment: The premiums are a tax-deductible business expense. The benefit paid to the company is treated as trading income, but this is offset when it's paid out as salary, which is a deductible expense. The director pays income tax and NI on the salary they receive, just like a normal salary.
• Benefit: It provides a far more tax-efficient way to secure long-term sick pay compared to a personal income protection plan, where premiums are paid from post-tax income.

A comprehensive business protection strategy often involves a combination of these policies. At WeCovr, we specialise in helping directors build a tailored protection portfolio that covers personal, business, and shareholder risks in the most tax-efficient way.

Wellness and Health: Proactive Steps for Company Directors

Insurance is a crucial safety net, but the best-case scenario is never having to use it. As a director, your health is your most valuable asset. The pressures of running a business can take their toll, so prioritising your well-being is not an indulgence—it's a core business strategy.

The Office for National Statistics (ONS) has consistently shown that work-related stress, depression, or anxiety is a leading cause of work-related ill health. For business leaders, the stakes are even higher.

Managing Stress

• Set Boundaries: The "always-on" culture is a recipe for burnout. Define clear working hours and protect your personal time.
• Delegate Effectively: You don't have to do everything. Trust your team and empower them to take on responsibility.
• Practice Mindfulness: Even 10 minutes of daily mindfulness or meditation can significantly reduce stress levels and improve focus.

Nutrition for Performance

Your brain needs high-quality fuel. Long days and skipped meals can impair your decision-making and energy.

• Avoid Processed Foods: Focus on whole foods—fruits, vegetables, lean proteins, and complex carbohydrates.
• Stay Hydrated: Dehydration can cause fatigue and "brain fog." Keep a water bottle on your desk at all times.
• Track Your Intake: Understanding your calorie and nutrient intake is the first step to improving it. To support our clients on their wellness journey, WeCovr provides complimentary access to CalorieHero, our AI-powered calorie and nutrition tracking app. It's a simple way to take control of your diet and fuel your body and mind for success.

The Power of Sleep

Sleep is not a luxury; it's a biological necessity. Consistent lack of sleep impairs cognitive function, memory, and emotional regulation.

• Aim for 7-9 hours per night.
• Create a Routine: Go to bed and wake up at the same time each day, even on weekends.
• Wind Down: Avoid screens (phones, tablets, TVs) for at least an hour before bed. The blue light can interfere with the production of melatonin, the sleep hormone.

By investing in your health, you are directly investing in the resilience and longevity of your business. It makes you a lower risk for insurers, potentially leading to lower premiums, and a more effective leader for your company.

Conclusion: A Smarter Way to Protect What Matters Most

For company directors in the UK, the Relevant Life Plan is more than just life insurance; it's a powerful financial planning tool. It allows you to provide comprehensive protection for your family, extracting value from your company in an exceptionally tax-efficient manner. The potential savings compared to a personal policy are simply too significant to ignore.

By transforming a personal expense into a tax-deductible business cost, you reduce your Corporation Tax bill and avoid personal income tax and National Insurance on the premiums. Coupled with an Inheritance Tax-free payout, it represents one of the most effective ways to secure your family's future.

However, navigating the world of business protection—from Relevant Life Plans to Key Person and Shareholder Protection—requires specialist knowledge. The rules are nuanced, and the choice of provider and policy structure can have long-term consequences.

This is where seeking independent, expert advice is invaluable. A specialist broker like WeCovr can analyse your unique personal and business circumstances, compare the entire market to find the most suitable and cost-effective solutions, and guide you through the application and trust process from start to finish.

Protecting your family and your business is one of the most important financial decisions you will ever make. Don't leave it to chance. Take advantage of the smart, tax-efficient strategies available to you as a limited company director.