UK Contractor Life Insurance Through Limited Company

Life insurance protects the contractor's family financially in the event of death. For PSC contractors there are two main routes: personal policies paid from post-tax income, or Relevant Life Cover paid by the company as a tax-deductible expense. The choice has material tax implications but similar practical protection.

This guide covers both structures, the policy types (term, whole-of-life, family income benefit), the trust structure used with Relevant Life Cover, and the comparison of overall cost.

Personal term life insurance

Term life insurance pays a lump sum if the insured dies during the policy term. Most contractors take a level term policy with a fixed sum insured (e.g. GBP 500,000) and a fixed term (e.g. 25 years). The premium is fixed for the term.

The premium is paid from the contractor's post-tax income. There is no tax relief on the premium. The benefit (if paid out) is normally tax-free to the beneficiaries provided the policy is written in trust or otherwise arranged to fall outside the deceased's estate.

Typical premium for a 35-year-old non-smoker: GBP 15-30/month for GBP 500,000 of cover over 25-year term. Premium increases with age, smoker status, and health conditions. Most contractors set up cover in their 30s or 40s when family or mortgage liabilities make it most necessary.

Worked example: a 38-year-old contractor with a GBP 350,000 mortgage and two children takes GBP 500,000 term life over 25 years (to age 63, approximately when the mortgage would finish). Premium GBP 22/month, paid from personal income. The cover would pay GBP 500,000 to the family if the contractor died, clearing the mortgage and providing reserves.

Relevant Life Cover through the PSC

Relevant Life Cover (RLC) is a specific UK tax structure where a company provides life cover for an employee (including the director-shareholder of a PSC). The premium is paid by the company as a deductible business expense; the benefit is paid into a discretionary trust and distributed to beneficiaries.

Tax treatment: premium deductible at corporation tax rate (saving 19-26.5%). No benefit-in-kind on the director (specific exclusion under section 393 ITEPA 2003). Benefit paid to trust beneficiaries is normally outside the deceased's estate (no inheritance tax). The combination is highly tax-efficient compared with personal cover.

The policy must meet specific RLC criteria: provided by an employer to an employee or director, benefits paid only to family/financial dependents (not the employer or business), benefit terminating at age 75 latest, premium ceasing on retirement from the company. Most providers (Aviva, Legal & General, Royal London) offer dedicated RLC products meeting these criteria.

Worked example: a higher-rate PSC contractor takes Relevant Life Cover at GBP 30/month for GBP 500,000 cover. The company pays GBP 360/year. Corporation tax saving on the premium GBP 68 (19% on GBP 360) plus the avoidance of dividend tax that would have been paid to extract the GBP 30/month equivalent personally - approximately GBP 540/year of tax saving on the GBP 360 premium. The net effective cost of the cover is GBP 360 - GBP 540 = negative, so the cover effectively saves money compared with the dividend extraction it replaces.

Family Income Benefit alternative

Family Income Benefit (FIB) is a variation of term life insurance where the benefit is paid as a regular monthly income for the remaining term, rather than as a lump sum. A 25-year FIB policy paying out in year 10 would continue paying monthly for the remaining 15 years to year 25.

FIB is typically cheaper than equivalent lump sum term insurance because the insurer's total exposure declines over the policy term. Some contractors prefer FIB for the structured monthly income (which matches family budgeting) versus a lump sum that the family must manage and invest.

The combination of FIB and a separate small lump sum (for immediate costs - funeral, mortgage clearance) is a common structure. The FIB provides ongoing income; the lump sum provides immediate liquidity.

Edge case: FIB benefits are typically not index-linked, so a long policy term sees the real value decline with inflation. Some FIB products offer indexation (typically 3% per year escalation of the monthly benefit) at a premium uplift. Contractors with longer terms (25+ years) benefit from indexation.

Joint life versus single life

Joint life policies cover two people (typically a couple) at a single premium. Joint life first death pays out on the first death of either insured; joint life last death pays out on the second death. First death is more common for family protection (typically clearing the mortgage and providing for the surviving spouse and children).

Single life policies cover one person each. A couple wanting equivalent protection would take two separate single life policies, each paying out on their own death. The combined premium is typically higher than a joint life first death policy.

The choice depends on the family's protection needs. Joint life first death works well where the surviving spouse needs the lump sum to clear debts and support the family. Two single life policies work better where each spouse has independent financial commitments or where flexibility matters for tax planning (each spouse's policy can be written in trust for different beneficiaries).

Worked example: a couple in their late 30s with shared mortgage and family. Joint life first death GBP 400,000 over 25 years: premium GBP 35/month. Two single life policies of GBP 400,000 each: combined premium GBP 50-60/month. The joint life saves GBP 15-25/month but pays out only once; the single life policies could potentially pay out twice (in the catastrophic case of both spouses dying within the term).

Choosing the right cover amount

Standard rule of thumb: 10-25x annual income for a typical family with mortgage and dependents. A contractor with GBP 80,000 of income, mortgage of GBP 300,000 and two children might target GBP 500,000-1,000,000 of cover.

More precise calculation: total of outstanding mortgage + 5 years of household expenses + childcare costs to age 18 + university fund + other liabilities. The total identifies the lump sum needed to leave the family in the same financial position without the contractor's income.

Term: typically until the youngest child reaches financial independence (around age 21-25) or until the mortgage is cleared, whichever is later. A 35-year-old with a 5-year-old child might take cover to age 60 (coinciding with the child reaching age 25) or to mortgage clearance, whichever is later.

Review at major life events: marriage, birth of child, house purchase, large income change. Each event changes the protection need. Most providers allow conversion to higher cover at a later date without medical underwriting if life-event triggers are met (the 'guaranteed insurability' option in some products).

Writing policies in trust

Writing a life insurance policy 'in trust' means designating a trust as the beneficiary rather than the insured's estate. The benefit on claim is paid to the trust, which the trustees distribute to the named beneficiaries. The trust structure has two main effects: faster payout (avoiding probate delay) and exclusion from the deceased's estate for inheritance tax.

Most insurers offer free 'in trust' setup at the point of policy purchase. The contractor names the trustees (often the spouse and another family member or trusted friend) and the beneficiaries (typically spouse and children). The trust deed can be standard wording from the insurer or bespoke for complex family situations.

Relevant Life Cover is automatically arranged in trust as part of the product structure. The contractor names the beneficiaries; the discretionary trust structure provides the IHT benefit by design.

Edge case: complex family situations (blended families, children from previous relationships, specific beneficiary intentions) benefit from professional trust drafting. A solicitor's fee of GBP 200-500 for a bespoke trust is typically worthwhile for substantial policies and complex families.

Frequently asked questions

Can I pay life insurance through my PSC?

Yes through Relevant Life Cover (RLC), a specific tax structure. The PSC pays the premium as a deductible business expense; the benefit is paid into a discretionary trust and distributed to beneficiaries. The combination saves corporation tax on the premium, avoids personal income tax extraction needed for personal cover, and keeps the benefit outside the estate for inheritance tax. Highly tax-efficient versus personal cover.

What's Relevant Life Cover?

A UK life insurance product specifically designed for company-funded employee/director cover. The premium is tax-deductible for the company, the benefit is paid via trust to beneficiaries, and the benefit is normally outside the deceased's estate for inheritance tax. Specific criteria must be met: provided by employer to employee, benefits to family or dependents only, age limit, premium ceasing on company retirement. Most major UK insurers offer RLC products.

How much life cover do I need?

Standard rule of thumb 10-25x annual income for typical family with mortgage and dependents. More precise: total of outstanding mortgage + 5 years of household expenses + childcare costs to age 18 + university fund + other liabilities. A contractor with GBP 80,000 income, GBP 300,000 mortgage and two young children typically needs GBP 500,000-1,000,000 of cover.

Should I take joint life or two single policies?

Joint life first death covers two people at a single premium and pays out on the first death of either. Single life policies cover one person each. Joint life is cheaper for typical family protection where the surviving spouse needs the lump sum. Two single life policies offer more flexibility (each in separate trusts for different beneficiaries) and potentially two payouts in catastrophic cases. The choice depends on family circumstances.

Is the life insurance benefit taxable?

Typically tax-free to beneficiaries where the policy is written in trust or otherwise arranged outside the deceased's estate. Without a trust, the benefit forms part of the estate and may be subject to inheritance tax (with the nil-rate band of GBP 325,000 and any RNRB applying). Relevant Life Cover is automatically arranged in trust, providing the IHT protection by structure. Personal policies should be written in trust to achieve the same outcome.