Director Income Protection

Helping you protect all the things you work hard for...

Drewberry™ provide pensions, investment and insurance advice for Money to the Masses readers throughout the UK.

 

Why Director Income Protection Insurance?

 

Income Protection for company directors provides a monthly income should you be unable to work due to accident or sickness.

 

It can be paid for by your business and can cover both your salary and dividends, providing you with tax efficient protection for your income.

 

When you work for yourself, there’s very little in the way of a sick pay safety net should illness or injury prevent you from working

 

Income Protection is the one protection policy every working adult should consider. Which? Money

 

Speak to our expert independent advisers or get an instant online quote to compare the UK’s leading insurers.

What is it for?
 

What Does Director Income Protection Cover?

Accident & Sickness

When the ‘Own Occupation’ definition of incapacity is used with company paid Income Protection, the policy can pay out for any medical condition that prevents you from working in your own specific job role.

As Income Protection Insurance does not limit your cover to a strict list of medical conditions and with many insurers having no standard exclusions it is the most comprehensive form of accident and sickness protection available for company directors.

Being a company director, you are able to cover between 50% and 80% of your salary and dividends right up to your expected retirement age.

Quick Tip: Some insurers will let you also cover your partners dividends if they hold a non-revenue generating role within your business.

What does it cover?
 

How Does Director IP Work?

Stage 1:
You cease working due to any accident or sickness which prevents you from doing your job role.

Stage 2:
You make a claim with the insurer. (You will need medical evidence and may need to complete a claims form.)

Stage 3:
The insurer will start to pay a monthly benefit to your company after you have been unable to work for the length of your deferred period. This benefit is distributed via PAYE to you and taxed during the process.

Stage 4:
The policy pays out until either you return to work or reach the maximum payout length, which could range from 1 year to retirement.

How does it work?
 

Do I Need Director Income Protection?

When deciding if income protection for directors is worthwhile, it makes sense to weigh up the risk of something happening and the potential consequences:

The Incapacity Risk:
14.7% of people aged 55+ had been out of work for at least 6 months at some point during their careers.

The Consequences:
For many people, government incapacity benefits, such as Employment and Support Allowance, simply can’t fully replace an income lost through illness or injury.

The Question:
If you lost your income how would you continue to meet your monthly outgoings without any sickness insurance?

Do I need cover?
 

Your Key Options

Choose your level of cover

Depending on the insurer, it is possible for Income Protection for company directors to cover anywhere from 50% to 80% of your gross (pre-tax) income.

Choose your deferred period

This is the length of time you would need to be off work before the policy kicks-in and starts paying out. Deferred period can range from 4 weeks to 12 months.

Choose your payout length

Short-term plans can payout for a maximum of 2 or 5 year, while long-term plans can continue paying out either until you return to work or you reach the end of the policy life, which is often aligned with retirement.

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Very important if you are either Self-Employed or a Company Director.

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In This Guide…

Andrew Jenkinson - Drewberry
Written by:
Michael Englefield
Content Manager at Drewberry
⏰  10 min read
 

What is Director Income Protection?

Directors’ Income Protection Insurance is designed for directors looking to protect their earnings from the financial risk of sickness or injury.

If you ever need to take time off of work to recover from a debilitating health condition, company paid Income Protection will provide you with monthly benefits to supplement a proportion of your income.

The difference between Income Protection for directors and standard Accident & Sickness Insurance, however, is that directors can use their company to pay for their policy rather than paying for it personally.

victoria slade, business protection expert at drewberry

Having your limited company pay for your Income Protection can offer greater tax efficiencies than having a personal policy paid for out of post-tax income. However, this will depend on your individual circumstances.

Victoria Slade
Business Protection Expert at Drewberry

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how does director income protection work?

How Does Income Protection Insurance for Directors Work?

Directors’ Income Protection works in much the same way as a standard personal policy. The main difference between the two being who is paying for the policy and how much cover is required. Remember business income protection is paid out before any taxation has been taken into account.

  • Step 1: You develop an injury or illness that impedes your ability to work. After receiving an official diagnosis from a medical professional, you decide to take temporary leave to pursue treatment and focus on your recovery.
  • Step 2: Upon beginning your time away from work, you contact your Income Protection provider as soon as possible to make a claim. You will need to provide them with a completed claims form and evidence of your condition, which usually comes in the form of a note from your GP.
  • Step 3: Should the insurer approve your claim, they will begin providing you with monthly benefits at the end of your agreed deferred period.
  • Step 4: Depending on the terms of your policy, you will be able to claim your Income Protection benefits until you recover, until you reach the maximum limit of your claims period, or until you reach retirement age.
  • Step 5: Until you reach the end of your policy’s life, you can make as many claims as you need to. Once you reach your policy’s cease age or you retire, the policy will end.
 

What Does Income Protection for Directors Cover?

Much like a standard Income Protection policy, a Income Protection for company directors will cover you for any injury or illness that prevents you from working. Most policies for directors use an Own Occupation definition of incapacity, which means that you will be able to claim insurance benefits as long as your health problem prevents you from carrying out your duties in your own occupation.

For directors, insurers define the ‘income’ covered by the policy as the policyholder’s gross salary plus dividends, of which they can insure up to 80%.

This insurance cover is available until you reach retirement age and you can claim as many times as you need to for as long as you need to during your career. However, depending on the options you choose when taking out your policy the length of time you are able to claim insurance benefits for may be limited.

tom conner, drewberry director

Anyone leaving an employed role to strike out on their own really needs to consider the sick pay they are leaving behind. Fortunately, there are products, like Income Protection, that can remove this risk and are very worthwhile considering.

Tom Conner, BSc, MPhil
Director at Drewberry

 

Covering Your Dividends with Income Protection

If you are a director of your own business, insurers will allow their definition of earnings to include dividend payments from the business to you. This means that you are able to insure up to 80% of your gross salary and dividends, depending on which insurer is considered.

In order to cover dividends, however, you must be a director who is actively contributing to the success of the company – either as part of a team or as the sole employee of the company. In other words, the dividend must be paid to you in lieu of salary for work undertaken.

Josh Martin, Business Protection Expert at Drewberry

It is very important to note that some insurers will base the maximum amount cover allowable on an average of the last three years earnings if cover is required for dividends, whereas other insurers will base cover on earnings over the previous 12 months. This can have a big impact on the most suitable choice of insurer.

Josh Martin, Cert CII
Business Protection Expert at Drewberry

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Victoria swiftly helped in finding a solution which offered the required cover, with a more competitive premium.

Doug Harvey
05/09/2018
Directors income protection options

Key Income Protection Options for Directors

When setting up your company director income protection you will have a fair few options to choose from that will have a real impact on the quality and cost of your policy. It is very important to know exactly what these are when you are deciding on the most appropriate policy given your personal circumstances.

 

Amount of Cover

You can cover as much as 80% of your gross earnings and dividends. However, while this much cover is available, it isn’t always wise to choose the maximum amount of cover. An increase in cover means that premiums will be more expensive. Think carefully about how much cover you need to afford your necessary expenses.

 

Premium Type

The premium type you choose affects the initial price of your policy as well as how this price will change or each year.

short-term vs long-term income protection

Level Guaranteed Premiums will not change in price during your policy’s life unless you choose to adjust your policy’s level of cover.

Age-banded Premiums will be adjusted in line with your age, increasing as you get older to offset your increased risk of claiming as you age and your health declines. Your insurer will either have a premium table or chart that determines by how much your premiums will rise as your policy ages, or they will increase your premiums at a fixed rate per year.

Reviewable Premiums can change in price unpredictably. These premiums are reviewed regularly by your insurer and adjusted in price in accordance to your changed circumstances and your policy provider’s changed circumstances. We normally recommend to clients that they avoid these types of premiums as they can be affected by tax rates, your claims history, and your insurer’s investment performance.

 

Definition of Incapacity

There are 4 main definitions of incapacity that insurers use to determine whether you are entitled to claim your insurance benefits:

  • Own Occupation: Your injury/ illness prevents you from carrying out your duties in your own occupation.
  • Suited Occupation: Your injury/ illness prevents you from fulfilling a role in your own occupation or any suitable occupation that you are qualified for.
  • Any Occupation: Your injury/ illness prevents you from being able to work entirely.
  • Activities of Daily Living: Your injury/ illness prevents you from performing basic tasks required to take care of yourself.

While specialised Income Protection for directors will normally offer own occupation cover, allowing you to claim if your health condition stops you from working in your specific occupation, other policies may vary in the definitions they use.

Insurers may either offer you a choice of definition, which will affect the cost of of premiums, or they will determine the appropriate definition to use depending on your occupation. The more hazardous your occupation is, the less comprehensive your policy’s definition of incapacity is likely to be.

Own occupation cover, however, will always be the best option available. All other options may prevent you from claiming, even if you are unable to work in your specific job. Definitions like ‘suited occupation’ can also be difficult to claim for because what defines a suited occupation can be subjective

 

Claim Duration

Most insurance companies offer two choices of claim duration: long-term or short-term. With a long-term Accident & Sickness Insurance policy, directors can continue receiving Income Protection benefits for a single claim all the way until their policy’s cease age which most often aligns with their retirement age.

While most Income Protection policies for directors offer long-term cover, it is possible to find policies that offer short-term Income Protection cover, although these are not as common. These policies will only pay out benefits per claim for a maximum of 1, 2 or 5 years depending on your chosen provider.

While choosing a short-term policy will considerably reduce your premiums, these policies may not be sufficient if you develop a debilitating illness. Regardless of whether you have recovered from your health condition, short-term policies will stop paying out as soon as you reach the claim duration limit. This means that there may come a time if you develop a long-term injury or illness that you will be left without any type of income.

Long-term policies, offer peace of mind and can provide you with a stable, monthly income for as long as you need it.

  

Setting your Deferred period

A deferred period is the period of time you would need to be off work before the plan begins to pay a monthly benefit, and ranges from 4 weeks to 52 weeks. Moving from a Director Income Protection Insurance plan with a deferred period of 4 weeks to one with a deferred period of 26 weeks could lower your monthly premiums by as much as 50%.

How long you decide to set the deferred period on your directors income policy will depend on three main factors:

  • Your current savings
  • Profit retained in the business
  • Your budget for the policy.

Plans with longer deferred periods will come with significantly lower monthly premiums and you may therefore wish to set a longer deferred period if you have a level of savings that you could use to support yourself before the plan begins.

 

Indexation

With your Director Income Protection Insurance plan it is possible to index link your chosen level of benefit from the outset of the policy so that the monthly sum insured increases each year in-line with inflation. For the purposes of indexation the level of inflation each year is measured relative to the Retail Price Index (RPI).

As a company director, you will be well aware of the financial risk of inflation. With a fixed level of monthly benefit set at the start of the plan the real value of this benefit level would be eroded over time by inflation. If the Bank of England manages to stick to its inflation target then your monthly benefit would be eroded by around 2% per annum, which would mount up over the life of the policy.

However, it is vital that you read carefully the terms of your policy before agreeing to indexation. With all insurers, your premiums will be increased with inflation as well as your benefit if you choose to index link your policy. However, some insurers will increase your premiums by an additional amount on top of the increase made to align your premiums with changes to the RPI. Over time, these little increases can add up and have an effect on the cost of your policy.

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personal vs company paid income protection

Personal or Company Paid Income Protection Insurance?

While specialised Income Protection for company directors is normally favoured, it’s also perfectly reasonable for directors and business owners to purchase personal policies instead.

Speak to Drewberry's advisers to find out whether you need a personal or director income protection insurance policy.

Income Protection policies for Directors covers up to 80% of gross earnings and dividends. With these types of policies it is also possible to cover both employer pension and National Insurance contributions.

In comparison, a personal insurance policy usually allows maximum cover up to 65% of pre-tax salary only and the policyholder will need to pay the premiums themselves.

If you claim on a personal policy, your Income Protection benefits will be delivered directly to you as a tax-free payment, whereas a director’s Income Protection policy requires them to arrange the distribution of the benefits that are paid to the company and they will be taxed in the process.

Michael Barrow, Independent Protection Expert at Drewberry

There are certain situations whereby the offerings of a personal policy may align closer to your needs. If you are unsure what is best for you and want to chat then please do not hesitate to pop us a call on 02084327333 or email help@drewberry.co.uk.

Michael Barrow
Independent Protection Expert at Drewberry

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How directors income protection is taxed

Directors’ Income Protection and Tax

While a personal Income Protection policy does not require you to pay tax on your benefits, the benefit from an Income Protection for directors policy will be taxed upon a claim.

income protection for directors is typically paid into and distributed by your limited company

Under a personal plan, the premiums are paid out of your personal bank account using income you’ve already had tax and National Insurance deducted from. As a result, the payouts from the policy are tax-free, which is why you are able to insure up to 65% of your gross monthly earnings.

Under a Director Income Protection policy, the policy is typically owned and the premiums paid by the policyholder’s company. However, despite the company paying for the policy, it’s not typically classed a a P11D or benefit in kind.

As the company owns and pays for the premiums, the benefit is taxable on a claim because the premiums are eligible for corporation tax relief. When a director claims on their Income Protection Insurance policy, the benefit is paid into the business first. It’s then taxed on distribution. In this instance, in order to align take-home pay, it is possible to insure up to 80% of your gross pay.

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Employee income protection

Providing Income Protection for Employees

If there are a number of directors and/or employees you would like to offer Income Protection cover to, a Group Income Protection scheme may be more relevant to your needs.

Similar to Income Protection for directors, the company pays for a Group Income Protection scheme, but the policy can cover several people at once. If any employees involved with the scheme falls ill or is injured, the insurer will pay out their insurance benefits to the company, which will be delivered to employee in the same way in which they receive their salary.

Group policies require a minimum of 3 employees to be covered, but terms, cost and cover offerings for group policies can be quite different depending on your insurer, the size of your group, and your employees’ circumstances.

sam barr-worsfold, independent protection expert at drewberry

For more information, feel free to read our Group Income Protection guide and speak to our advisers. If you decide to look further into this type of employee benefit, we can help you find the right policy options, compare quotes, and apply for the policy that’s right for you.

Sam Barr-Worsfold, DipFA
Independent Protection Expert at Drewberry

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compare best UK income protection policies for directors

Compare Directors Income Protection

While Aegon and Unum offer specialised Income Protection for company directors, the rest of the top director offer personal policies that can be tailored to your needs.

Director Income Protection Policies

Aegon

Aegon

  • Covers up to 75% of pre-tax income to a maximum of £160,000 per year including yearly pension contributions and National Insurance contributions.
  • Maximum entry age of 59 years.
  • Deferred period of 4, 8, 13, 26, or 52 weeks.
  • Aegon offer a free health and wellbeing service, Health Assured, providing confidential support and advice.
Unum

Unum

  • Covers up to 80% of earnings to a maximum of £300,000 per year as well as yearly pension contributions and National Insurance contributions.
  • Maximum entry age of 64 years.
  • Deferred period of 4, 8, 13, 26, or 52 weeks.
  • Unum offer free a Rehabilitation Service with policies, providing qualified consultants to give guidance and support to claimants.

Personal Income Protection Policies

Aviva

Aviva

  • Covers up to 55% of gross earnings and a maximum benefit of £20,000 per month.
  • Maximum entry age of 59 years.
  • Deferred period of 4, 8, 13, 26, 52, or 104 weeks.
  • Aviva offer Support Plus services with policies, giving policyholders access to Bupa Healthline, remote doctor services, counselling, and career support.
LV

Liverpool Victoria

  • Covers up to 60% of your pre-tax earnings and a maximum benefit of £12,500 per month.
  • Maximum entry age of 59 years.
  • Deferred period of 1, 2, 3, 6, or 12 months.
  • With a policy you can access LV Doctor Services, which can be used remotely by phone or through a specially provided app. These services include convenient access to private prescriptions, remote GP services, and contact with doctors and specialists for a second medical opinion.
Vitality

Vitality

  • Covers up to 60% of your earnings up to £2,500 per month and 50% of any income you receive on top of this. The maximum monthly benefit is £16,666 per month.
  • Maximum entry age of 59 years.
  • Deferred period of 1 week, 1 month, 3 months, 6 months, or 12 months.
  • Add ‘Vitality Plus, Optimiser, or Wellness Optimiser‘ to your policy and in exchange for maintaining an active lifestyle you can reduce your premiums and claim regular rewards, such as high street discounts.

 

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get advice on directors income protection

Get Expert Director Income Protection Advice

Robert Harvey, Independent Protection Expert at Drewberry

If you would like to run through your Director Income Protection options with one of our expert advisers, feel free to contact us on 📞 02084327333. We will help you find the most appropriate policy options, compare quotes from the top UK insurance providers, and  help you apply for your policy once you have made your decisions.

Robert Harvey, Cert CII
Head of Protection Advice at Drewberry

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Compare Top 10 UK
 Protection
Insurers
 
Takes approx. 60 seconds
Type of Policy
Income Required
per
month
Date of Birth
Loading your options...
Thank you for using our Quote Tool
If you need some help, just call us!
T: 02084327333
Our in-house Experts are here to provide FREE impartial advice!
Our Experts can answer all your questions
Our Experts can send you more appropriate options based on your personal circumstances

Very important if you are either Self-Employed or a Company Director.

Our online quote tool is good but our Experts are better

Oue Experts have access to far more insurers and can often find a better deal offline.

Saves you time, let our Experts do what they are best at

Frequently Asked Income Protection Insurance Questions

 
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