For many business owners, especially those of small companies, becoming unwell or suffering an accident which prevents them from working is a significant threat which will usually mean a loss of some or all of their income. Fortunately, insurance products such as Executive Income Protection exist to protect you from the risk of loss of income. In this guide, we explain everything you need to know about this popular and tax-efficient form of income protection.
Executive Income Protection Insurance is a type of business protection that pays out a regular monthly benefit should the insured employee or director become too ill or injured to work. Popular with contractors and directors working in their own limited company, it helps to lessen the impact of long term illness or injury, covering up to 80% of your income, whether that be wages or dividends.
Executive income protection policies are usually written based on an "own occupation" definition of incapacity. This means your policy will pay out should you become too sick to work or suffer an injury that prevents you from working in your specific job.
Executive Income Protection protects your earnings against any medical issue you or your team may suffer from, save those you've experienced in the past (i.e. pre-existing conditions). This means that if you suffer an accident or illness that stops you from working, you'll be able to make a claim on your policy.
Insurers will cover up to 80% of your income, which is higher than personal policies that typically max out at 60%. Most Executive Income Protection Insurance policies will also cover your income via both your wages and dividends. What's more, with some policies you can cover your spouse's dividends too - the only stipulation is that they hold a non-revenue generating position in the business, such as an admin role.
Coverage with these policies is broad, but there are of course some exclusions you should be aware of:
Similarly to a personal Income Protection policy, the plan will pay out in the event that the insured is unable to work due to illness or injury. However, rather than the benefit being paid to the individual directly, it's paid to the business.
The great thing with Executive Income Protection is that it can cover up to 80% of an individual's gross income, including PAYE salary, dividends and P11D benefits. Some providers will even allow cover beyond 80% by covering employer national insurance and pension contributions. The only thing to bear in mind is that payments to the individual who is insured will be subject to PAYE taxation, so that should be factored in when calculating the amount of benefit required.
An Executive Income Protection Plan is designed to protect a team member of a limited company and pay out a monthly benefit should the employee be too unwell or injured to work. Payments continue until the employee returns to work, the benefit period ends or they die, whichever is sooner.
Similarly to a personal income protection policy, there are six main considerations when taking out EIP:
Every year over a million people in the UK find themselves unable to work due to serious injury or illness, yet according to the consumer advice magazine Which?, just 9% of us have some form of income protection insurance.
With over 2 million Brits currently unable to work due to being classed as "Long Term Sick" it would be fair to say as a nation we're very much exposed to the risk of loss of income through a health condition.
If you're a director of a limited company, you typically won't have anything like sick pay to fall back on should you not be able to work. Yes, there are state benefits to support those who can't work, but it would be fair to say that those alone wouldn't cover most people's bills and outgoings. That means that as a director of a small business, you're at a high risk of financial hardship, should you suffer an injury or severe illness.
The experts at Which? put it quite plainly:
"The one protection policy every working adult in the UK should consider is the very one most of us don't have - income protection."
Which?
On the face of it, it may seem logical to get unemployment insurance, rather than income protection, but we'd advise against it for most limited company directors. The reason is that the terms of these policies can make it very difficult to make a claim if you run or play a significant part in the running of a business. As a company director with an Unemployment Insurance claim, you need to prove that you were made redundant through no fault of your own and had no prior knowledge of the redundancy, both of which can be hard to do when you're the boss.
We feel that the risk of an unsuccessful claim is simply too high when it comes to Unemployment Insurance for clients of ours that work for themselves.
There are three types of premiums you can choose from when configuring your Executive Income Protection Insurance policy; Reviewable, Age-banded and Guaranteed Premiums. In this section of our guide, we explain what each is and why you might choose one over another.
Reviewable premiums as the name suggests are "reviewable" by the insurer, so the price you pay can be changed for a variety of reasons. It could be that the insurer sees an increase in the number of claims, or perhaps economic factors force them to update their pricing. Because of their flexibility, policies that are written on a reviewable basis generally start out cheaper but get more expensive over time as reviews take place.
Age-banded premiums usually start off cheaper but will steadily rise each year as you age. Unlike reviewable premiums however, age-banded premiums can only rise by a pre-set amount each year, with the increases being linked to your age and risk of claiming, not any other external factors.
Guaranteed premiums can't be adjusted over the life of the policy unless you yourself make a change. That means that the premiums are typically more expensive at the outset, but as they can't be changed or reviewed upwards, the policy is usually cheaper over the life of the plan.
As with personal income protection insurance policies, you can choose to index link your benefit so that the sum assured increases each year in line with inflation. Without this proviso, you're at risk of the actual value of the policy being eroded over time as the price of products and services increase. By indexing the policy, you'll ensure that your benefit increases in line with inflation throughout the policy term. In order to do this, your premiums will also need to rise by at least the level of inflation each year, so be aware that your premiums will increase over time.
As we outlined earlier in this guide, most policies we set up are written on an "Own Occupation" basis, which simply means you can't perform your normal role due to sickness or injury. There are however certain circumstances where a different definition of incapacity is used by the insurer.
Own occupation cover is the best level of income protection insurance as it means you can claim as long as your sickness or injury makes you unable to work in your specific job role. For example, if a director of an IT company injures his or her hands and he or she can't repair computers as per normal, a claim can be made.
Suited occupation means that in order to receive a payout the employee needs to be unable to perform their current job or any other role that they might have experience in or training to perform. So, returning to our example of the director of the IT company, he or she might be able to perform some light administrative duties while injured and therefore wouldn't have a claim under suited occupation.
Finally, the worst level of cover would be based on "Any occupation" or work tasks. Policies written with this definition of incapacity will typically be inexpensive but also very difficult to claim on. We, therefore, tend to recommend avoiding this definition.
When you take out a personal income protection policy, you'll pay via your own bank account, which means you've already paid income tax and national insurance on that money, so should you make a claim, you won't need to pay any tax on the benefit (payout). That's not the case with executive income protection as the premiums are paid by the company before taxation.
When a claim is made, the funds will be paid to the company, not the insured individual. So to distribute the money to the employee or director, tax will need to be paid, whether that be income tax and national insurance or dividend tax or both. Because of the tax on the benefit, you can insure a higher percentage of your income (80%) in comparison to personal policies (60%).
Executive IP is classed as a business expense and is therefore usually tax-deductible against corporation tax.
For all tax related matters we recommend you seek advice from your accountant as tax positions can vary.
No, despite the business paying for the policy and the benefit being for the individual, most policies are not classed as P11D benefits in kind.
Currently, only a handful of insurers in the UK offer Executive IP; they are Legal & General, Aegon and Unum. In this section, we look at each of their offerings so you can compare the features of their policies.
Aegon's executive income protection will cover any taxable earned income such as your salary, commission, bonuses and overtime, along with P11D benefits which could be lost in the event of incapacity. They provide two definitions of incapacity, "own occupation" and "activities of daily work", with the latter being similar to "any occupation/work task" in that you must be unable to perform any type of work to claim.
For more detailed information please see this Aegon factsheet or contact us on 01202 714178.
Legal & General have only just started to offer this type of business protection but have a strong product with generous limits. Similarly to the others, L&G will cover not just the employee's pre-tax salary, but their dividends and P11D benefits too. In addition, you can also arrange to cover costs such as employers' National insurance contributions and employer pension contributions.
For more detailed information please see this Legal & General webpage or contact us on 01202 714178.
Unum are perhaps a lesser-known name in the world of financial services but they are one of the leading providers of Executive IP. Similarly to the others in this guide, they'll protect up to 80% of the employee's gross earnings, including P11D benefits. The benefits can be paid on a level basis or increasing at either a fixed rate or in line with the Retail Price Index (RPI). They also provide a lower cost, "short-term" option, which has either 2,3 or 5 year benefit payment periods.
For more detailed information please see this Unum webpage or contact us on 01202 714178.
There are various other types of business protection insurance that work alongside executive income protection insurance. Click a link below to learn more or to request quotes:
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