7 reasons why contractors should have Relevant Life Insurance

There are several guides to Relevant Life Insurance for limited company contractors online; you've probably read them.

But, for the biggest part, they've got it wrong! Or, should I say, got you wrong!

Fair enough, they provide salient facts about taking out Relevant Life Insurance, just as I'll eventually provide here. But they all omit one critical factor: you -- the person, writes John Yerou, CEO of Freelancer Financials.

So, I'll start with you, in this rundown for ContractorUK of seven reasons why contractors should have Relevant Life Insurance.

1. Peace of mind

My team and I speak to hundreds of limited company contractors every month. And, for sure: Relevant Life Insurance offers plenty of nice-to-haves:

• premiums being tax-deductible,
• paying through the company, and
• exempt from P11D status, among others.

N.B. As you’ll guess from the above list, Relevant Life is not for PAYE umbrella contractors!

But these factors aren't what matter most to the limited company contractors we speak to when they're taking out their mortgage with us. Peace of mind is.

Perish the thought, that the worst happens to you. It probably won't. But our clients don't want to take that chance. They want to know that, should the worst happen, their family will be provided for. With a Relevant Life Policy (RLP), they can rest easy.

So, the TL;DR version:

• take out a policy;
• cross it off your to-do list;
• get on with living your life!

2. Achieving parity with your full-time equivalents

When you were cutting your teeth in your trade as an employee, your employer would have provided a ‘Death-in-Service’ benefit. As a contractor, you don't have that safety net.

You are, however, your own employer. And that's what Relevant Life Insurance is for: it allows you to provide a Death-in-Service benefit for your family, even though you are, in fact, in service to your own company.

3. Greater cover than PAYE Death in Service Benefit

And while we're thinking back to employee Death-in-Service, can you remember what the payout was? Three, maybe four times your annual salary?

Relevant Life allows for up to, in most instances, up to FIFTEEN times your salary and dividend drawings.

Your earnings as a contractor are potentially much higher than as a PAYE employee. It follows, then, that your legacy should be covered accordingly.

4. Your limited company pays the premiums (which are tax-free)

As an employee, you'd have paid your life insurance premiums personally, therefore after tax. As a contractor, your limited company pays the premiums.

Pleasingly, 100% of the premiums your company pays you can claim against corporation tax. In effect, that makes your contribution wholly tax-free.

It should go without saying, but I'll say it anyway: you should not use Relevant Life Contributions solely for the purpose of tax avoidance.

5. Benefits without being benefits

If you've been a contractor for a few years, you'll know that HMRC has whittled down benefits to next-to-nothing -- travel and subsistence and buy-to-let being the most recent and painful.

But, hurrah! There’s no P11D necessity for Relevant Life contributions. HMRC do not class this type of policy as a benefit-in-kind, so there's absolutely no requirement to declare them.

6. Trust in RLP, for ease and efficiency

Relevant Life Insurance is written into a trust from day one. It's not a complicated procedure, and many insurers are allowing the signing of the trust documents to be done digitally. More and more insurers are even offering signature-free trusts to streamline the process further.

The payout goes straight to your beneficiaries, so avoids corporation, inheritance and income taxes.

7. Immune from lifetime pension allowance

At the time of writing, the standard lifetime pension allowance is £1,073,100 (tax year 2023/24) before tax. Normal pension lump sum payouts would count towards that total.

That's not the case with Relevant Life lump sum payouts, which do not count towards the lifetime allowance.

What Relevant Life does NOT cover

While the benefits of Relevant Life are obvious, they're not a catch-all cover policy. You would need to take out separate insurance to cover:

• Income Protection (keep your eye out ContractorUK readers, as we’ll demystify Income Protection very soon)
• Critical Illness Cover

Also, at no time -- whether still working or upon retirement -- does an RLP hold any monetary surrender value.

Your company pays the premiums while the company exists. Once the limited company ceases to exist with none of the payout clauses triggered, the policy ends, too.

The only time the policy will pay out is upon the death of the contractor named on the policy.

Don't 'Do Nothing'

We know. Not everyone reading this will pick up the phone and take out a policy.

If you're a contractor earning several hundred pounds a day, you might feel you're invincible. And from an income perspective, yes: you're on pretty high ground.

But, immune to the quirks of fate you're not. Contractors need life insurance like everyone else. And while you might perceive it as a nagging thing on your to-do list, insurance isn't something you should keep putting off or relegating to your 'nice-to-have' department.

Life insurance, especially for contractors who don't have death in service benefit like employees, is imperative. Trust me, you'll feel better once you've taken out a Relevant Life Policy, as will your dependents. But it's your call (so make it)!

Find out more about relevant life insurance here.