It’s more tax-efficient for company directors (or employees) to take out life insurance and critical illness policies via the company, rather than personally. This is because premiums are usually deductible against corporation tax, if they constitute an ‘allowable business expense’. It would be much costlier for a director to pay for the same insurance level out of the personal pocket, after income tax and National Insurance contributions.
Life insurance cover
For life insurance, the company can take out the policy under ‘relevant life’ rules and pay the premiums, which can be offset against corporation tax (subject to meeting the allowable business expense criteria). If the insured passes away, the benefits are paid out tax-free to the intended beneficiary/beneficiaries. Typically policies are written into trust, so it does not form part of the estate for inheritance tax purposes and the payout is made without delay. The proceeds from a claim are also not subject to income or corporation tax.
Critical illness cover
The company can take out critical illness cover under ‘key person’insurance rules. This essentially covers the company if the insured ‘key person,’ usually a director, is diagnosed with any of the covered critical illnesses. This helps the company cover any losses if the key person is unable to work due to serious illness or injury.
Insurer statistics show that a non-smoking 40-year-old is about four times as likely to fall victim to a serious illness than to die before the age of 65. Therefore, critical illness cover can provide an important financial lifeline.
The premiums are paid by the company and the amount of cover paid out will also go to the company. The deductibility of premiums for corporation tax purposes depends on the circumstances of each particular case. The proceeds from a claim can also be subject to corporation tax.
This is not as tax-efficient as the relevant life rules, but you can still make savings by taking out the policy via the company, instead of personally. Tax savings can be amplified if the director is a higher or additional rate taxpayer.
New tax-efficient combined insurance cover
A new type of business insurance is available for life and serious illness cover under relevant life rules. As is typical with insurance policies, there are various conditions that must be met. For this policy, the insurer will only pay out if the insured is going to retire or significantly reduce their responsibility and hours due to a defined list of serious illnesses.
Nonetheless, the new product is an exciting option for company directors and small business owners, as it is more tax-efficient than separate critical illness and life insurance products. It allows a critical illness payout to go to the family, rather than the company, and the claim proceeds are paid out tax-free.
To find out more call 03300 564 446, or email Jon Hussey: jon.hussey@luminwealth.co.uk
This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
