Executive Income Protection Insurance

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.

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What is Executive Income Protection insurance?

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.

About Executive Income Protection:

  • Can be used for directors or employees of limited companies
  • Protects an individual from loss of earnings due to illness or injury
  • Tax-efficient way of taking out income protection
  • Covers up to 80% of your income, including dividends and directors' loans
  • Option to cover employer national insurance payments and pension contributions
  • Cover a spouse's dividends too*
*where the spouse is performing administrative duties only, and income dependent upon the insured employee’s ability to work.

What does an Executive Income Protection insurance policy cover?

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.

What isn't covered by income protection insurance for executives?

Coverage with these policies is broad, but there are of course some exclusions you should be aware of:

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    Illnesses or injuries as a result of illegal drugs or as a result of alcohol or substance abuse
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    Self-inflicted injuries
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    Illnesses or injuries that occur in pursuit of criminal acts
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    Illnesses or injuries that occur while travelling to countries with political instability, areas of active conflict, or to those where the Foreign Office has advised against travel to, or where there are active epidemics.
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    Some pre-existing conditions may be excluded upon application depending on; their severity, whether it is an ongoing issue, or if the condition is resolved the length of time elapsed since recovery.

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Benefits of Executive Income Protection

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.

Main benefits of Executive Income Protection Insurance:

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    Receive a monthly payout if you can't work
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    Premiums are usually a tax-deductible business expense
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    Typically not classed as a P11D benefit in kind
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    Covers a higher amount of income compared to personal IP
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    Option to cover employer national insurance contributions

How does executive income protection insurance work?

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.

How does executive income protection work

An overview of how it works:

  • 1
    The business takes out an Executive IP (income protection) policy
  • 2
    The employee's income is protected
  • 3
    The employee is injured or is unwell and can't work
  • 4
    A claim is made; once verified and deferral period met the monthly benefit is paid out
  • 5
    Payments stop when the employee returns to work, they die or the benefit period ends

What options are there with an Executive Income Protection Policy?

Similarly to a personal income protection policy, there are six main considerations when taking out EIP:

  • Level of cover
    Policies will cover up to 80% of your pre-tax income and when you're configuring your policy you'll be able to choose how much cover you would like.
  • Length of policy
    The policy can run until the employee retires or to a maximum age of 70 years.
  • Payout period
    You can choose between short-term plans which pay out for 1-5 years, or a long-term plan that pays out until the employee is well enough to work again or reaches the policy end date.
  • Deferral period
    The deferral period is the amount of time you need to be off work before the policy starts to pay out. The longer the deferral period the lower your premiums will be.
  • Guaranteed or Reviewable premiums
    Reviewable premiums are cheaper initially however the insurer will have the option to review the prices periodically (usually every 5 years).
  • Index linking
    Choose whether you wish the plan benefit to track with inflation. This is slightly more expensive but means the plan is likely to remain more relevant in the future.

Do I need Executive Income Protection?

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?

Do I need unemployment insurance?

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.

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The three types of premiums for Executive Income Protection

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

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 premium

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

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.

Index link your chosen benefit

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.

Definitions of incapacity

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

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

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.

Any occupation/work tasks

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.

How is Executive Income Protection taxed?

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.

Is executive income protection a P11D benefit in kind?

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.

The main providers of Executive IP

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. If you would like quotes from these companies, please click here to request one.

Aegon Logo

Aegon

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.

Headline facts:

  • Maximum benefit of up to 80% of the employee's pre-tax income
  • Maximum income of up to £150,000 per year
  • Includes pension contributions
  • Includes employer NI contributions
  • Maximum age at benefit expiry - 70 years


For more detailed information please see this Aegon factsheet or contact us for free comparison quotes.

Legal and general logo

Legal & General

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.

Headline facts:

  • Maximum benefit of up to 80% of the employee's pre-tax income
  • Maximum income of £300,000 per year for a level policy
  • Maximum income of £210,000 per year at the start of an increasing policy
  • Option to increase coverage in line with the Retail Price Index
  • Maximum age at benefit expiry - 70 years
  • Option to include both employer NIC and pension contributions


For more detailed information please see this Legal & General webpage or contact us for free comparison quotes.

Unum logo

Unum

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.

Headline facts:

  • Maximum benefit of up to 80% of the employee's gross income
  • Maximum benefit of £300,000 at the start of a plan
  • Choose between level cover or increasing


For more detailed information please see this Unum webpage or contact us for free comparison quotes.

Other Types of Business Protection

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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Executive Income Protection FAQ