Who Is A Contractor In Life Insurance?

Life insurance is an essential policy for contractors, especially those who are self-employed, as it can provide financial security for their loved ones in the event of their death. It is a way to ensure that their family is provided for, that their mortgage is cleared, and that their children are cared for. There are two main types of life insurance policies available to contractors: term cover insurance policies and whole-of-life policies. Term cover insurance policies provide financial support to the policyholder's family and dependents for a specified period, while whole-of-life policies offer lifelong coverage, guaranteeing a payout as long as the premiums are up to date. Contractors can also choose between a standard life insurance policy, which is typically taken out by individuals, and a relevant life insurance policy, which is secured by a limited company to provide life cover for its employees, including directors.

Lump-sum payout to dependants

A lump-sum payout to dependants is the most common type of life insurance payout. This option gives the beneficiary full control over a large sum of money, which they can use to cover significant expenses or debts. Lump-sum payouts are generally not counted as taxable income, although there are rare cases where an estate tax may be applied.

Lump-sum payouts are beneficial as they provide immediate access to the full amount, which can be crucial for covering large expenses such as funeral costs, which currently average £4,141 in the UK. Lump-sum payouts can also help beneficiaries remain in the family home by covering mortgage payments, as well as day-to-day family living costs, which average £2,700 per month in the UK.

However, receiving a large amount of money at once can be overwhelming for some beneficiaries, who may struggle to manage such a large sum effectively. Additionally, if the lump sum is placed in a savings or checking account, the beneficiary may need to spread it across several accounts to avoid exceeding the Federal Deposit Insurance Corporation (FDIC) deposit insurance limit of $250,000 per depositor, per FDIC-insured bank.

Lump-sum payouts are a good option for younger beneficiaries, as they provide flexibility and can adapt to changing financial needs over time. They are also a good option if the beneficiary has considerable debt that they would like to pay off quickly.

Tax relief

Life insurance policyholders can benefit from tax relief in several ways. Firstly, they may be able to reduce their taxable income by claiming tax relief on the premiums they pay for their life insurance policy. This is known as Life Insurance Relief. The amount of relief they can claim depends on their total employment income, with higher-income earners receiving more relief. Additionally, the policy must meet certain requirements, such as being purchased from an insurance company with an office or branch in Singapore.

Secondly, life insurance policies can provide tax-efficient benefits upon the death of the insured person. For example, the payout from a Relevant Life Insurance policy, which is a type of policy available to contractors, is tax-free for the beneficiaries. This can result in significant savings, especially if the payout is substantial. Furthermore, Relevant Life Insurance policies are paid for by the limited company, allowing contractors to enjoy tax relief on premiums as they are considered a legitimate business expense. This can lead to savings on income tax and corporation tax.

Lastly, life insurance policies can also offer additional tax-deductible benefits while the policyholder is still alive. For example, some insurers include access to private GP services and second medical opinions as part of their policies, which can provide tax-efficient healthcare benefits. Overall, life insurance policies can provide valuable tax relief for policyholders and their beneficiaries, making them a financially attractive option for contractors seeking to protect their loved ones.

No benefit in kind (BIK) charges

A contractor is a self-employed individual who works in a specific sector, such as construction, IT, engineering, project management, or design. They may or may not own a limited company and are not eligible for the same benefits as employees, such as death-in-service payouts.

Contractors can benefit from life insurance policies that provide their loved ones with a cash payout in the event of their death during the policy term. This can help cover expenses such as the mortgage, daily living costs, funeral costs, and outstanding debts.

One type of life insurance policy available to contractors is the Relevant Life Insurance policy. This policy is paid for by the contractor's limited company, resulting in tax relief on premiums and no benefit-in-kind (BIK) implications. Here are some key points about the no BIK charges aspect of Relevant Life Insurance policies:

No Benefit-in-Kind (BIK) Charges

• A Relevant Life Insurance policy is paid for by the contractor's limited company, which means there are no BIK income tax and National Insurance Contribution (NIC) charges for the contractor.
• In contrast, a standard personal life insurance policy, such as term or whole-of-life insurance, cannot be purchased through the contractor's business, and thus the premiums may be subject to BIK taxation.
• BIK refers to non-cash benefits provided by an employer in addition to an employee's salary. These benefits, such as private health insurance, company cars, or gym memberships, are usually taxable.
• With Relevant Life Insurance, the contractor's limited company pays the premiums, making them a business expense and resulting in tax relief. This is a significant advantage for contractors as it reduces their tax liability.
• By structuring the policy as a business expense, contractors can maximize their tax efficiency and avoid the BIK charges typically associated with similar benefits provided by an employer.

Payment 25X earnings

A contractor is someone who doesn't have the benefits of being a regular employee, and so must ensure their loved ones have a financial safety net in the event of their untimely death. This is where life insurance comes in.

Relevant Life Insurance is a tax-efficient policy that allows companies to offer a 'death-in-service' benefit to its employees and directors. It is set up by the company and pays out a tax-free, lump sum on the death of the person insured. The proceeds go directly to the employee's family or financial dependents.

One of the benefits of Relevant Life Insurance is that it allows you to choose a payout of up to 25 times your earnings, including salary and dividends. This is known as the "25X Rule" and is a simple guideline to help you plan your retirement savings. It is based on the assumption that a well-invested retirement portfolio can sustainably provide 4% of its value each year to cover living expenses, also known as the "4% Rule".

Here's how the 25X Rule works:

• Calculate your annual expenses: Start by estimating your annual living expenses in retirement, considering factors like housing, healthcare, travel, and leisure.
• Multiply by 25: Multiply your estimated annual expenses by 25 to determine your retirement savings target.
• Create a savings plan: Based on your current savings and the time until retirement, create a plan to reach your target, factoring in contributions to retirement accounts, investments, and other savings vehicles.
• Adjust for inflation: Remember to adjust your calculations for inflation, as your expenses are likely to increase over time.
• Review and revise: Regularly review your retirement plan and adjust your savings strategy as needed to stay on track.

It's important to note that the 25X Rule doesn't account for social security or pensions, as it assumes that your savings are the sole source of retirement income. Depending on your retirement goals and lifestyle, you may need to save more or less than 25 times your expenses. Additionally, the success of the rule depends on the performance of your investments.

By combining the 25X Rule with other financial planning tools and seeking professional advice, you can create a robust plan to secure your retirement future.

Flexible policies

Life insurance is an essential policy for contractors to ensure their loved ones are financially secure in the event of their untimely death. It can also help clear any outstanding debts, such as a mortgage, and cover funeral expenses.

Life insurance policies for contractors offer flexibility in terms of coverage and payment options. The coverage amount can be tailored to the contractor's family needs, ensuring that their loved ones receive an adequate financial safety net. The policy can provide a lump-sum payout or a monthly income stream to the dependents, helping them manage their expenses effectively.

Contractors have the option to choose between term cover insurance and whole-of-life policies. Term cover insurance provides financial support to beneficiaries upon the policyholder's passing during the cover period, while whole-of-life policies offer lifelong coverage, guaranteeing a payout as long as premiums are up to date.

Additionally, contractors can benefit from flexible payment methods. For instance, if they own a limited company, they can pay for their life insurance policy using their company's pre-tax profits, resulting in substantial savings. This option is tax-efficient and can save contractors up to 50% compared to paying for a standard policy out of their post-tax salary.

Relevant Life Insurance (RLP) is another flexible option for limited company contractors. With RLP, the company pays the premiums, resulting in tax savings for the contractor. RLP also provides death-in-service benefits similar to those offered by large firms to their employees. The proceeds from an RLP claim are held in trust for the policyholder's dependants, ensuring a quicker distribution of funds without the need to deal with probate.

Furthermore, life insurance policies can be written in trust, offering several advantages. Writing the policy in trust helps avoid or minimise inheritance tax for beneficiaries, gives the policyholder greater control over the payout, and helps loved ones avoid the lengthy probate process.

Frequently asked questions