Life insurance for engineering contractors using limited companies
Engineering contractors frequently operate through limited companies when providing specialist services to clients. This structure is common across sectors such as construction, infrastructure, energy and manufacturing where contractors work on defined projects rather than permanent roles.
Where an engineer works through a limited company, life insurance can often be arranged through the company rather than personally.
A relevant life policy allows the company to provide life cover for the contractor as an employee of the business. The company pays the premiums and any benefit is paid to the insured person’s beneficiaries through a discretionary trust.
For engineering contractors who operate through their own company, this structure can make life cover significantly more tax efficient than arranging a personal policy.
Where engineering contractors commonly work
Engineering contractors work across many technical sectors. Limited company contracting is particularly common in project based industries where specialists are brought in for defined assignments.
- civil and infrastructure engineering
- oil and gas projects
- energy and utilities
- rail and transport infrastructure
- manufacturing and industrial engineering
- construction project delivery
Many contractors work on long projects lasting several months or years, often through recruitment agencies or direct consultancy contracts.
Why contractors often use limited companies
A limited company allows engineering contractors to provide services to clients while maintaining control over their finances and tax affairs.
The company signs the contract with the client or agency and invoices for the work completed. The contractor then pays themselves through the company.
In most cases income is structured using:
- a director salary
- dividends from company profits
This structure also allows the company to provide certain employee benefits for the contractor, including company funded life insurance.
How company funded life insurance works
When life insurance is arranged through a limited company, the policy is taken out by the company on behalf of the director or employee.
The premiums are paid directly by the business and the policy is written into trust so that any benefit is paid to the contractor’s chosen beneficiaries.
You can read a detailed explanation here: what is relevant life insurance?
How insurers view contractor income
Engineering contractors often have income structures that differ from traditional employment.
Income typically flows into the limited company first before being paid to the contractor.
Insurers normally assess remuneration using a combination of:
- director salary
- dividend income
- evidence of contract earnings
This allows insurers to understand the contractor’s true earnings when determining the appropriate level of cover.
Further details are explained here: can salary and dividends be used as proof of income?
Example situations where this structure is used
Engineering contractors often arrange company funded life cover in situations such as:
- a civil engineer working on major infrastructure projects through their own company
- a mechanical engineer contracted to manufacturing firms
- a project engineer delivering energy sector projects
- a technical consultant providing specialist engineering expertise
In each of these situations the contractor operates through a limited company and may therefore be able to arrange life insurance through that company.
Tax treatment of company paid life insurance
Where the policy meets HMRC requirements, the premiums are normally treated as a business expense for the company.
This means they may be deductible when calculating corporation tax.
In addition:
- the premiums are normally not treated as a benefit in kind
- no employee or employer National Insurance usually applies
- policy payouts are normally paid free of income tax
Because the policy is written into trust, the payout is also normally outside the insured person’s estate for inheritance tax purposes.
You can read more about this here: relevant life insurance and inheritance tax
Further information on HMRC rules can be found in the Employment Income Manual: HMRC guidance
When this approach may not apply
Company funded life insurance works best when the contractor operates through their own limited company.
It may not be suitable where:
- the contractor works through an umbrella company
- there is no limited company structure
- the individual operates as a sole trader
In these situations a personal life insurance policy may be more appropriate.
Getting advice as an engineering contractor
Engineering contractors often have variable income depending on projects and contract rates. Before arranging life insurance through a company it is sensible to review the company structure and expected earnings.
An adviser will normally consider:
- the contractor’s company structure
- recent contract income
- the level of cover required
- trust arrangements for beneficiaries
This ensures the policy is structured correctly and complies with HMRC rules.
If you want to estimate the cost of cover you can use our calculator here: relevant life insurance calculator
You can also request a quote here: get a relevant life insurance quote