Safeguarding your future – Personal protection through business

In Part 1 of this financial planning series, we explored the importance of protecting your business. Now, we shift our focus to protecting yourself and your loved ones, a vital aspect of financial planning that ensures the security of both your business and your personal well-being as a business owner.

Personal protection encompasses insurance policies designed to shield your health, income, and safeguard your family from a premature death. It's a holistic approach to securing your future. As a business owner, you have a unique opportunity— obtaining personal protection through your business can offer cost savings through tax efficiency.

In this article, we’ll explore two key policies: Relevant Life Cover and Executive Income Protection, shedding light on their importance and benefits in personal financial planning.  

Understanding Relevant Life Cover

Relevant Life Cover, often described as one-person death in service cover, is an invaluable tool that provides financial security for the families of business owners.

At its core, Relevant Life Cover is a life insurance policy specifically designed for a business owner that is set up and paid for by the business. It is mainly taken out by businesses that do not have enough eligible employees to warrant a group life scheme (otherwise known as Death in Service cover).

It’s worth noting the person covered must be an employee of a UK business which can include salaried company directors. Relevant Life plans are not available for sole traders, equity partners of a partnership or members of a Limited Liability Partnership.

Advantages of Relevant Life Cover

• Tax Efficiency: What sets it apart from personally owned life insurance is its tax efficiency. The tax benefits associated with Relevant Life Cover can result in significant savings for the business owner as premiums paid by the business for Relevant Life Cover are typically viewed as an allowable business expense, not a benefit-in-kind, assuming certain rules are met. This means that businesses can offset the cost of the life insurance policy when calculating their corporation tax liability and the individual covered does not need to pay income tax or National Insurance on the premiums.
• Security for Loved Ones: It ensures that in the event of a business owner’s death, their family is provided for financially—the policy is written into Trust and, therefore, typically inheritance tax-free, thereby ensuring the family receives the full benefit without any additional tax burden.

In short, Relevant Life Cover enables employed business owners to take out life insurance and terminal illness benefits through their company for their own benefit.

Understanding Executive Income Protection

For most people, their future financial well-being is very much dependent on them being healthy enough to work and earn an income. This would be jeopardised if they were to suffer from long-term illness and were unable to work.

Most will have rainy day funds that would cover any loss of income for a short period of time and once this depletes, it is important to have plans in place to ensure that they continue to receive an income while they aren’t working.

Through an Executive Income Protection policy, businesses are able to provide a monthly benefit to an employee based on a proportion of their earnings in the event that they are unable to work due to long-term ill health. Cover can include the employee’s earnings, dividends and P11D benefits. Additional cover can be arranged at an extra cost to cover employer pension contributions and National Insurance contributions.

The terms for these policies vary and most employers usually choose a benefit that is inflation-linked and cover that would run until the date at which their employees expect to retire (e.g., age 65 or state pension age).

It differs from personally owned income protection in that the monthly benefit is paid to the business that then passes this on to the employee after deducting income tax, National Insurance contributions and pension contributions. Payment of premiums are usually treated as an allowable business expense except where the insured person is a shareholding director in which case the tax treatment should be established in advance to maximise tax efficiency.

Advantages of Executive Income Protection

• Financial Stability: It ensures that you can meet your financial commitments. The regular income replacement provided by the policy ensures that the employee’s essential family expenses, such as bills, mortgage or rent, groceries, and daily costs, can still be met.
• Peace of Mind: Knowing you have a financial safety net in place can reduce stress during challenging times and aid in your recovery.
• Long-Term Security: Executive Income Protection provides ongoing support until you recover or reach retirement age, ensuring long-term financial security.

Executive Income Protection offers a variety of cover options designed to fit different situations and needs. These plans can be tailored to provide the right level of coverage based on your specific circumstances.

How can we help?

Whether you're exploring Relevant Life Cover, Executive Income Protection, or other solutions, our team is ready to provide guidance and help you make informed decisions about your financial future. To have a confidential chat, please get in touch with our Chartered Financial Planner, Görkem  Barron (gorkembarron@lfwm.co.uk) or Director, Andrew Tricker (andrewtricker@lfwm.co.uk).