Can I Claim Life Insurance as a Business Expense?
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Can life insurance be claimed as a business expense? The answer is both yes and no – it all depends on the type of life insurance and who benefits from it. Read on to learn more.
Life insurance for business owners is an essential part of ongoing financial responsibility. For many business owners, a substantial part of the financial security for both their business partners, employees, and families lies with them and their death can have a devastating toll on those they leave behind. In the case of businesses, the loss of a director or top-level employee can be catastrophic.
Life insurance is a vital way for key business personnel and responsible family breadwinners to ensure the safety and security of others should the worst happen, but where does the burden of life insurance premiums lie?
Key Takeaways
- There are multiple life insurance that can help businesses.
- Life insurance policies to provide financial support to employees are considered a business expense.
- Life insurance policies can include payouts to the family of the deceased, or directly to the business for operational stability.
- Life insurance policies placed in trust are exempt from inheritance tax.
Understanding Life Insurance – The Basics
Life insurance is a form of insurance that pays out a cash lump sum upon the death of the insured party. Premiums are paid either monthly or annually to the insurer. Life insurance can be tailored to cover many different needs, from decreasing term assurance (DTA), which is a cost-effective insurance designed to repay a mortgage, to level term assurance (LTA) that pays out a set agreed sum should the insured die during the years that make up the term of the insurance cover. Life insurance can also be customised to cover non-fatal incidents, such as serious illness and periods where you are unable to work.
These additions, such as critical illness cover (CIC) are usually appended to a standard life insurance policy to provide a great and more comprehensive level of overall cover. For business owners and directors, life insurance is a valuable way of ensuring that their families and business partners receive money that is needed to continue on financially after their death.
Life Insurance for Businesses
There are four main types of life insurance that are relevant to business owners and employees:
- Personal life insurance
- Death in service
- Relevant life insurance
- Key person life insurance
Personal Life Insurance
Personal life insurance refers to policies that are taken outside of the sphere of the business. The premiums are paid for by the policy holder and the final sum is paid out to personal beneficiaries, typically the family of the deceased.
Personal life insurance is completely independent to the business and is tied to the individual. This type of insurance is not able to be claimed as a business expense and has no criteria that means the business is involved in any way. Personal life insurance can already exist when the business is incorporated or be taken out subsequently, and anyone with personal life insurance can leave the employ of the business and move on without their life insurance being affected.
In short, personal life insurance has nothing to do with the business in any way. Business owners with personal life insurance are insuring themselves for family and not business purposes.
PROS:
- No ties to the business means individuals are free to leave the employ of the business without affecting their life insurance policy.
- Policy can be used for mortgage assurance purposes.
- Entire sum assured will be paid to the personal beneficiary (family member).
CONS:
- Cannot be claimed as a business expense.
- Does not protect the business.
- Premiums are paid after income tax and national insurance contributions.
Death in Service
Death in service (DIS) refers to a group life insurance policy that is designed to provide employees of the company a life insurance benefit to be paid to their family beneficiaries upon their death.
It is provided and administered by the business and forms part of a package of benefits for employees. Death in service is meant to provide a core level of life insurance to employees and often provides lower payouts than personal insurance policies that may have been taken by individuals. For many employees, however, the only life insurance they will have is the DIS cover, making it an appreciated incentive as part of their employment package.
As death in service is part of the business employment package, those who leave the employ of the business will no longer be covered. Because DIS is a benefit provided by the business to its employees, it is considered a business expense and is not subject to corporation tax. Furthermore, the payout is organised through trust, making it a tax-free sum when released to the beneficiary (no inheritance tax).
PROS:
- A positive benefit incentive for employees.
- Policy is paid directly to employee’s family to provide for them after death.
- Policies available for up to 25x employee salary (typical policies are for 3x to 5x).
- No inheritance tax.
- Considered a business expense.
CONS:
- Death in service is a group policy and at least three employees are required to obtain it.
- Cover is only for those who remain employees and does not extend to anyone who leaves the company.
- Cover may not be considered sufficient for some employees and may need to be ‘topped up’ with a personal life insurance policy.
Relevant Life Insurance
Relevant life insurance shares many similarities with death in service. Like DIS, relevant life insurance is a policy obtained and paid for by the business, however relevant life insurance is a individual form of life insurance rather than a group policy.
For company directors, relevant life insurance offers a way to obtain cover that’s practically identical to personal life insurance, yet to put that cover through the business to make use of some tax benefits.
Like death in service, relevant life insurance is considered a business expense, meaning it is not subject to corporation tax or employee income tax. For micro businesses with few employees, or company directors looking to insure themselves rather than provide life insurance as a company wide employee benefit, relevant life insurance is a compelling product that can effectively lower the annual cost of premiums with little downside.
However, it is important to note that just like death in service, relevant life insurance is tied to the business and should the insured leave the employ of the company, they will no longer hold the life insurance policy.
This latter issue may be of particular relevance for company directors as they age. For example, a 30-year old company director who takes out a 25-year level term assurance as personal life insurance will pay the same premiums each year until the policy ends at 55.
However, the same director with relevant life insurance for a similar 25-year policy who leaves the company at 45, will have to take on a completely new ten-year LTA at that time, suffering considerably higher premiums due to age.
Ultimately, any savings made in the 15 years of the relevant life insurance policy may swiftly be lost subsequently and the overall total cost of the life insurance over 25 years could be substantially greater.
For those who remain with the company for the full lifespan of the relevant life insurance policy, however, the tax benefits in choosing the business-oriented policy over a personal one may be significant.
PROS:
- Paid as a business expense.
- Available to replace Death in Service for companies with few employees.
- Policies available for up to 25x salary.
- No inheritance tax.
CONS:
- Policy is tied to the business.
- Can be lost if the business struggles or enters liquidation.
Key Person Life Insurance
Key person (historically called ‘keyman’) life insurance is a specialist product developed for the primary purpose of protecting the business should a key member of the business personnel die.
The policies of the three previously described life insurance products are all focussed on providing financial support for the family of the deceased – with key person life insurance, the sum assured is paid to the business upon the death of the insured person. Additionally, many key person life insurance policies include critical illness cover (CIC) that pays out should the insured become incapacitated through illness or injury.
Key person life insurance, therefore, provides a business with a measure of financial security should one of its directors or other essential personnel pass away or become incapacitated.
There are many reasons why key person life insurance is valuable to a business:
- Where business operations would suffer significantly with the death or incapacitation of the key person.
- Where business financial obligations, such as loan payments, are the responsibility of the key person.
- Where important business relationships would disintegrate with the loss of the key person.
- Where a contracted client or customer requests an additional guarantee of security before finalising a project with the business.
- Where new personnel would need to be employed to replace the key person.
- Where mourning following the death or incapacitation of the key person would result in a temporary cease of normal business operations.
Understanding that the family as well as the business will suffer hardship at the loss, many key person insurance policies offer a dual purpose, setting aside a portion of the sum assured for the family of the deceased as would be normal with personal or relevant life insurance.
As a business product, key person life insurance premium may be listed as a business expense and is thus not subject to corporation tax; however, there are exceptions to this rule, including:
- When the key person life insurance covers a significant shareholder, as the policy fails HMRC’s ‘wholly and exclusively’ test that determines if an an expense is incurred for the purposes of the business and only for that purpose.
- When the key person life insurance is taken to guarantee a loan, as in this case the benefit is to the lender and not the core business.
Additionally, the payout is a taxable trading receipt so will be taxed as income to the business. Like other forms of business-paid life insurance, key person life insurance is lost if the covered individual leaves the company’s employ.
PROS:
- Often considered a business expense.
- Protects the business interests.
- Can be used as additional security for loans and client contracts.
- Can be tailored to include payout for family.
- Typically includes CIC (critical illness cover) to provide support in the case of incapacitation.
CONS:
- Policy is for key business personnel only.
- Payout is taxed as company income.
- Premiums that do not meet the HMRC ‘wholly and exclusively’ test will be taxed.
Life & Critical Illness Insurance
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