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Is your family protected?

28 July 2020
Mark Friend
Reducing Tax, Payroll, People, Structuring a Business, Building a Business

Being your own boss is risky at the best of times. If anything unexpected happened would your family be protected?

No one knows what is around the corner. You could be off work on long term sickness or in an accident which leaves you permanently disabled or worse dead. If you are self employed or a  director of a limited company what would be the impact on your family? For most of us it is likely to be financially devastating.

Ideally you will have built wealth and a business which can sustain you and your family whatever the circumstances, however in practice this is unlikely, particularly if your business is small and in its early years and say you have a young family.

Most of us will resort to insurance policies and the three most popular with the self employed and company directors are:

  1. Life cover.
  2. Critical illness cover.
  3. Income protection insurance.

All three are usually personal policies and not tax deductible for the business.

We won’t cover health insurance in this blog but will include it in a new blog we will be preparing shortly.

Life cover

This does exactly what it says on the tin and provide a lump sum on death for your loved ones. The insurance proceeds are not usually taxable and can be used in any way your family sees fit.

Critical illness

Critical illness insurance provides you with a lump sum of money if you are diagnosed with certain illnesses or disabilities.

The kinds of illnesses that are covered are usually long-term and very serious conditions such as a heart attack or stroke, loss of arms or legs, or diseases like cancer, multiple sclerosis or Parkinson’s disease.

If you make a claim the money is not taxable and can be used in any way you like.

Income protection

Income protection insurance pays you a regular income if you can’t work because of sickness or disability, and continues until you return to paid work or you retire. Income protection insurance is also known as permanent health insurance.

The amount of income you are allowed to claim will not replace the exact amount of money you were earning before you had to stop work. You can usually expect to receive about a half to two-thirds of your normal earnings before tax.

All three of the above-mentioned insurance policies are essential, particularly if you have dependents such as young children and want peace of mind. We strongly recommend you discuss your position with a financial advisor.

We work with a number of financial advisors and can introduce you to one who will be able to assist you.

Tax efficient policies

We have worked closely with financial advisors over many years in respect of relevant life policies.

These policies are highly tax efficient and provide death in service benefits for employees. If you are a company director under PAYE then your limited company can provide this valuable benefit as an expense of the company to you – i.e. the company gets tax relief on the premiums and there are no benefits in kind for you as the director.

The plan is restricted to provide life cover or a watered down version of critical illness cover (basically if you are unable to return to work). The cover cannot contain any waiver of payment, critical illness or income protection benefits and must cease before the life assured’s 75th birthday. As with normal life cover any claim on the insured will be paid out tax free to the insured’s loved ones.

If the premium was £200pm for a director who is a higher rate taxpayer then the tax savings can be significant. Let’s say a relevant life policy costs the company £200pm. To get £200 out of the company as a net dividend to pay the same premium will cost the company £365.80. Corporation tax would be £69.50 and the dividend tax £96.30. A tax saving of £165.80 per month by simply paying the premium through the company as a relevant life policy!

If you are interested in relevant life policies please contact us and we will put you in touch with a trusted financial advisor.

There are other insurances which can also go through the company, for example key man insurance where the company pay for life cover on the insured but where the beneficiary on any pay out is the company itself. This can be really useful if you have a key member of the team who would be difficult to replace and their death would be damaging to the company.

If you have any queries in respect of this article then please contact Mark Friend.

The content in this blog is correct as at 28/07/2020. See terms and conditions.

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