Dentist Rajpreet Drills Into Income Protection
Find out why dentist Rajpreet turned to Income Protection Insurance to safeguard his financial future...
Running your own business is an exciting endeavour. However, as a company director working for yourself, there’s often little or no sick leave benefits if you need to take time off work. Whether your absence is due to illness or injury, being unable to work is likely to cause some financial worry.
If you’ve come here searching for a way to protect your income, you’re in the right place. This guide covers all you need to know about Directors Income Protection, such as the costs involved, how it’s taxed and your policy options.
Income Protection for company directors is an insurance policy designed especially for directors. It provides a monthly income to cover your core outgoings if you’re unable to work due to accident or sickness. A policy can:
While some directors may have savings to fall back on, it’s not the case for everyone. And since directors working via their limited company often have very little in terms of sick pay entitlement, how would you cover your core outgoings?
You still need to pay for your mortgage/rent, household bills and general day-to-day expenses, which is where Directors Income Protection shows its importance. It can provide a helpful financial lifeline if you’re unable to work.
EXPERT TIP 🤓
According to consumer group Which?, Income Protection is the one policy every working adult should consider.
Income Protection for Directors works in a similar way to standard Income Protection. You take a policy out and should you be unable to work due to accident or sickness, you will receive a monthly benefit. This benefit can then be used to cover your monthly outgoings.
How you pay for Directors Income Protection is where its key difference lies. Unlike a personal plan, it can be paid for through your limited company. This usually offers significant tax savings. Not only this, in the event of a claim, rather than the benefit amount being paid directly to you, it would be paid to your company to then be forwarded on. We discuss this in more detail later on.
When taking out Income Protection as a company director, it’s important you get it right. There are many terms you need to understand and things to consider to ensure you get the best policy. We go through these below.
It’s possible to cover anywhere from 50% to 80% of your gross (pre-tax) salary and dividend income as a benefit each month. How much cover you need will depend on your own personal circumstances.
To cover dividends, you must be a director who’s actively contributing to the success of the limited company. This can either be as part of a team or as the sole employee of the company. The dividend payments must be paid to you in lieu of salary for work undertaken.
When choosing your level of cover, consider your core outgoings first, rather than opting for the maximum cover. The more you cover, the higher the monthly premiums.
EXPERT TIP 🤓
Some insurers allow you to include your partner’s dividends, as long as they hold a non-revenue generating role within your business.
The deferred period is the length of time you would be off work sick or injured before your insurer begins paying out. Deferred periods can range from one week to over a year. It’s important to work out how long you could survive on any savings or sick pay before you need the policy to kick in.
Longer deferral periods reduce premiums notably, compared to shorter ones. So, if you can afford to wait a little longer, you’ll pay less each month for your policy premium.
This refers to the age the cover will end. Most people align it to the age where they anticipate retiring. Many providers run policies all the way up to the age of 70. However, this will be significantly more expensive than cover that stops at age 60.
Short-term plans pay out for a maximum of 1, 2 or 5 years per condition, per claim. Long-term policies continue paying out either until you are well enough to return to work or you reach the end of the policy.
While short-term cover for 1, 2 or 5 years may feel like a long time, there are many serious illnesses that could leave you unable to work for longer.
We recommend long-term protection if you can afford comprehensive cover. No one can predict what might happen and if you receive a long-term diagnosis, you’ll want your finances covered.
Rauri Taylor
Independent Protection Expert
When buying Income Protection, you have three types of premiums to choose from:
With Company Director Income Protection, you can index link your level of benefit. Indexation ensures your monthly benefit increases each year in line with inflation. Your insurer will review any changes to the Retail Price Index (RPI) and review your policy. Then they will adjust your cover accordingly to avoid a decrease in value.
GOOD TO KNOW 🤓
If you do choose to index link your policy, this will increase the amount you pay for your monthly premiums.
The definition of incapacity is important, as it’s how the insurer determines whether you are fit to work or not and able to make a claim.
There are three main definitions of incapacity to consider for your Directors Income Protection:
We always recommend own occupation for company directors, as it will cover your own work duties.
Other definitions of incapacity, such as ‘Suited Occupation’ or ‘Any Occupation’, may limit your ability to claim if you’re well enough to work in another role.
Rauri Taylor
Independent Protection Expert
Income Protection for company directors can pay out up to 80% of your combined salary and dividends if you can’t work due to illness or injury. It covers:
The policy protects your income if a health condition or injury stops you from working. Providing you opt for ‘own occupation’ cover, this will cover you if you can’t work in your specific role as a director.
When you apply for Income Protection, the insurer will ask about your medical history. These questions focus on your health, particularly over the past 5 years. You may even be asked to undergo a medical check prior to getting cover.
If you disclose a medical condition, your insurer might:
If you have any pre-existing health conditions that may impact your cover level, it’s best to discuss your situation with a financial adviser to ensure you get suitable cover.
If you need help, please don’t hesitate to pop us a call on 02084327333 or email help@drewberry.co.uk.
As with most insurance policies, there are a few automatic exclusions. For instance, most policies don’t pay out for illnesses or injuries:
Other than these, there are few standard exclusions. Your insurer determines what you’re covered for based on your pre-existing medical history.
No one wants to think about becoming unwell or getting injured, but it’s important to look at the risk of this happening. Doing so can help you plan ahead and ensure that, if you’re unable to work, you are financially covered.
So when you ask yourself the question ‘do I need Directors Income Protection?’ it’s important to think about the following.
Many of us simply don’t believe poor health will ever be a problem, or that we’ll suffer a life-changing accident. But the reality is, you can’t predict the future and you’re actually more at risk of developing a condition than you may think.
Company directors are employees, so most are entitled to Statutory Sick Pay. This is £109.40 per week. Your employer — i.e. your limited company — pays this for up to 28 weeks. However, few small companies offer their directors paid sick leave above this.
Even if you have considered paying sick pay, there may be a lack of funds within your business if you’re unable to generate revenue.
One of the main government incapacity benefits is Employment and Support Allowance (ESA). This can pay up to £84.80 per week, depending on the severity of your disability.
For many company directors, ESA wouldn’t fully replace their usual income if they’re off work ill or injured. While other state benefits are available, these often have strict eligibility and depend on your condition.
Our recent Drewberry™ Employee Benefits survey found that 1 in 5 employees don’t have enough savings to last more than a week. Considering the average UK household expenditure is £481.50 per week, many people don’t have savings to cover this.
This is why self-employed personal finance author and blogger Mrs Mummypenny took out Income Protection. She sought out the valuable peace of mind protection products can offer.
The cost of Directors Income Protection depends on your specific job role and a variety of other factors. Below are some examples of the costs depending on factors, such as the provider, your age, and whether you smoke.
Each Directors Income Protection provider will charge a different monthly premium. This is because each one has its own appetite for risk and can offer different services and benefits. So it’s always good to shop around.
To show how monthly premiums can differ from provider to provider, we’ve pulled some quotes below. These are assuming:
Different Providers | |
|---|---|
£38.81 | £60.58 |
The older you are at the start of your policy, the higher your premiums. This is due to the increased risk of sickness or injury as you age.
Below are some example monthly premiums for company directors of differing ages using the same policy options as above. These are for guaranteed premiums.
30 | 40 | 50 |
|---|---|---|
£25.74 | £38.81 | £60.12 |
Insures may increase the cost of your policy if you have a pre-existing medical condition at the time of applying. Or they may decide to exclude it altogether.
Pre-existing conditions are normally excluded due to the long-term treatment and medication needed, which would increase the cost for the insurer.
Smokers put themselves at a higher risk of developing a health condition. Some insurers charge higher premiums if you smoke. Not every insurer, though.
Here’s an example of the difference in cost per month for a non smoker and a smoker. This is based on the above policy options for a 40-year-old.
Smoker Vs. Non Smoker | |
|---|---|
🚬 | 🚭 |
£63.05 | £44.48 |
Insurers offer deferred periods of 4, 8, 13, 26, or 52 weeks. The longer this period, the lower your premiums will be, as the insurer doesn’t have to pay out straight away.
Here are some example costs of policies with different deferred periods. These are based on the previously used policy options from above, just with the deferred period changed.
Length Of Deferred Period | Cost Of Policy |
|---|---|
4 weeks | £48.48 |
8 weeks | £38.81 |
13 weeks | £26.39 |
You can see how a longer deferred period reduces premiums, but opting for a 13 week wait should only be considered if you can live off savings etc. for that length of time.
If you’d like personalised quotes, you can use our Income Protection comparison tool to compare quotes from the top UK insurers.
Sophie Guiver
Independent Protection Expert
When you buy personal Income Protection, paid from your personal bank account, the insurer pays the benefit tax-free if you claim. This is because you’ve already paid tax on the money you paid the premiums with.
However, with Income Protection for company directors, your limited company pays the premiums. HMRC usually grants your company corporation tax relief on these premiums, so you don’t pay tax on them.
HMRC then taxes the benefit to compensate. In the event of a claim, the insurer pays the benefit to your company, as the company is the owner of the plan. It’s then up to you to distribute these funds tax-efficiently with your accountant.
When you distribute the benefit from your company as income, HMRC taxes the payout at this point, like how it taxes your earnings.
To compensate for the fact HMRC taxes the benefit, insurers let you protect up to 80% of your earnings through Directors Income Protection. This is compared to a maximum of 70% with a personal plan.
P11D / benefits in kind are benefits, such as company cars or mobile phones, an employer offers staff. HMRC taxes employees for these. Some insurance policies, like Private Health Insurance, are benefits in kind, while others aren’t.
HMRC does not consider Income Protection for company directors as a P11D / benefit in kind. This means there’s no extra tax to pay.
If you’re considering Director Incomes Protection, you’ll want to know you can guarantee a pay out if you need to make a claim.
We have a claims team to support you through the process and make it as smooth as possible so you can focus on your recovery. The general process when making a claim is as follows:
In 2022, leading insurers Liverpool Victoria and The Exeter paid out over 92% of valid Income Protection claims.
Neil is a client of Drewberry and took out an Income Protection policy with British Friendly. He was a member for 4 years before he needed to claim.
He became unwell and had pains in his stomach. After consulting his GP and having further tests, Neil was diagnosed with Stage 2 Bowel Cancer and needed to make a claim. Find out more about Neil’s claim 👇.
We run an annual protection survey to find out what the UK public thinks about protecting their finances. Each time the results come in, we find that most people heavily underestimate just how many claims are successfully paid out.
Below is a table of the top UK insurers and their successful claim payout rates for the last few years. As you can see, most insurers pay out well over 90% of claims.
Insurer | 2020 | 2021 | 2022 |
|---|---|---|---|
Zurich | 85% | 99% | 85% |
Vitality | 96.8% | N/A | 96.5% |
Shepherds Friendly | N/A | 95% | 96.2% |
Cirencester Friendly | 94% | 93.6% | 95.4% |
Holloway Friendly | 98% | 94% | 93.4% |
British Friendly | 87% | 84% | 90% |
Liverpool Victoria | 95% | 93% | 92% |
The Exeter | 91% | 93% | 92% |
Aviva | 87.5% | 85.4% | 94.3% |
Legal & General | 93% | 81% | 82.2% |
There are three major insurers offering Income Protection for company directors:
However, if these aren’t suitable, there’s a wide market for personal policies that you pay for as an individual, out of your own bank account.
You can find expert reviews for each of the insurers we work with below. Our guide to the best Income Protection Policies in the UK may also be useful.
It’s worth noting that Aegon and Legal & General offer both personal cover and cover for directors.
Remember, it’s not always the cheapest plan that’s the best—policies and providers vary considerably. Compare premiums from the top UK insurers with our Income Protection quote tool.
If there are a number of directors and/or employees you’d like to offer Income Protection to, Group Income Protection may be more relevant to your needs. Unlike directors’ cover, Group Income Protection protects an entire team rather than a single employee.
If any employees on the policy become ill or suffer an injury, the insurer will pay out their benefits to the company. The business then uses this benefit to pay the employee’s salary.
Group policies usually require at least five employees to be able to set up a scheme. In terms of cost and cover, they can vary depending on your insurer, the size of your team, and your employees’ circumstances.
If you think a group policy would be more suitable for your needs, don’t hesitate to get in touch. Pop us a call on 02084327333 or email help@drewberry.co.uk.
Nadeem Farid
Head of Health & Wellbeing Benefits
With Income Protection, there’s no initial qualifying period. This means if you take out cover and are unfortunate enough to become ill / injured the following day, you’re covered.
But there’s the deferral period to consider. This refers to how long you need to be out of work before you can make a claim.
The deferral period can be as short as 1 week or as long as 6 months. It’s up to you when you set-up your policy. Should a claim arise, you’ll start receiving your benefit once you have been out of work longer than your chosen deferred period.
No, Directors Income Protection is not considered a P11D / Benefit in Kind. That means there’s no additional tax to pay as a result of having a policy as a company director.
Traditional Long-Term Income Protection for company directors protects your earnings throughout your working life. You’re able to make as many claims as you need to. Anytime you find yourself too unwell or injured to work, you can make a claim.
Contractors who work through their limited company with no employer sickness pay have a real need for Income Protection. Through their limited company, they can take out Directors Income Protection and the premiums can be paid for by their business.
But a sole trader would need to set-up a personal policy. The premiums of which would be paid from their net income.
Due to how it’s taxed, Income Protection for company directors is more complicated than a personal policy. As such, we highly recommend getting expert advice when considering your Directors Income Protection. Our team can help you find the right policy and ensure you have the cover you need.
We are here to help, please do not hesitate to pop us a call on 02084327333 or email help@drewberry.co.uk.
We started Drewberry™ because we were tired of being treated like a number.
We all deserve a first class service when it comes to issues as important as protecting our health and our finances. Below are just a few reasons why it makes sense to talk to us.