Has your life insurance kept pace with your business?
As a business grows, the way its owner manages money usually changes too. Pricing gets reviewed, operations are refined, dividends and pension contributions are optimised, and conversations with the accountant turn to corporation tax.
But life insurance is often left exactly as it was. For many limited company directors, it was set up in the early days and never looked at again. The reason for taking it out was sound, but the way it's structured may no longer be.
A common oversight
When a business is just starting out, personal life insurance is a sensible choice. You want your family protected and the mortgage cleared if the worst happens.
As profits grow and tax planning becomes more sophisticated, though, that policy is often still paid personally from income that has already been taxed. The company pays corporation tax, you take salary or dividends, you pay personal tax, and only then is the premium paid. The bigger the business gets, the bigger that inefficiency becomes.
It's worth asking yourself: when did I last review how my life insurance is set up, rather than just how much cover I have?
An option many directors find out about too late
Relevant life insurance was designed specifically for limited company directors and business owners. Rather than you paying the premiums personally, the company pays for the cover, and in most cases the premiums are treated as an allowable expense under HMRC rules.
As a result:
- The company's taxable profit is reduced
- Premiums aren't treated as employee income
- It isn't a benefit in kind
- You're no longer paying for cover out of already-taxed income
The cover still protects you and your family personally. The difference is that it's funded in a way that fits how your business now works. Many business owners simply weren't aware of this option when they first bought cover.
Why it matters more as profits rise
The more profitable a business becomes, the more an inefficient set-up costs. Paying personally may have seemed trivial when profits were small. Years later, with larger dividends and more tax to pay, the same arrangement can cost considerably more than it needs to.
Reviewing your life insurance isn't about cancelling your protection. It's about making sure it matches the size of your business today.
An example
Imagine a 44-year-old director whose company has grown substantially over the last three years. They pay £95 a month for a personal life insurance policy, funded from post-tax dividends.
That's £1,140 a year (£95 × 12) paid from income that has already been taxed, or £11,400 over ten years (£1,140 × 10).
If the same cover were arranged as relevant life, the company would pay the premium directly. The premiums would be treated as an allowable business expense, reducing corporation tax, with no benefit in kind and no extra personal tax to pay. The family's protection would stay the same, but the arrangement would be more tax-efficient. Over time, the saving can add up, especially for directors taking significant dividends.
Why it rarely gets reviewed
Life insurance tends to be filed under "done". It's in place, it does its job and having it feels responsible.
But as a business grows, circumstances change. A set-up that suited a company making £40,000 in profit may not be the most efficient for one making £200,000. Including your protection in your wider tax planning for the year ahead can reveal simple but worthwhile improvements.
Is your life insurance set up for where your business is now, or where it was when you started?
Final thoughts
Being tax-efficient doesn't always mean complicated strategies or new investments. Sometimes it's about reviewing what you already have and checking it's set up in the best way.
For many growing business owners, relevant life insurance is one of the simplest and most overlooked changes they can make. As your business changes, your protection should change with it.
