Why Director Income Protection?
Provides you with a tax free monthly income should you be unable to work due to accident or sickness.
Cover both your salary and dividends and gain access to specialist plans which can be paid for by your business.
Income Protection is the one protection policy every working adult should consider. Which? Money 2013
Speak to our expert independent advisers or get an instant online quote to compare the UK’s leading insurers.
What does Income Insurance cover?
Accident & Sickness
When the ‘Own Occupation’ definition of incapacity is used the policy can payout for any medical condition that prevents you from working in your own specific job role.
As income protection policies are not limited to a strict list of medical conditions that they cover and with many insurers having no standard exclusions, income protection is the most comprehensive form of accident and sickness protection available.
Being a Company Director you are able to cover between 50% and 70% of your salary and dividends right up to your expected retirement age.
How does Income Protection Insurance work?
You cease working due to any accident or sickness which prevents you from doing your job role.
You make a claim with the insurer.(You will need a letter from your doctor and may need to complete a claims form).
The insurer will start to pay a monthly tax free benefit after you have been unable to work for the length of your deferred period.
The policy pays out until either you return to work or reach the maximum payout length, which could range from one year to retirement.
Do I need Director Income Protection?
When deciding if income protection insurance is worthwhile it makes sense to weigh up the risk of something happening and the potential consequences:
The Incapacity Risk:
1 in 10 people have been unable to work due to illness or injury for +6 months (The Guardian/Unum Survey, 2011).
With government incapacity benefit of only £99.15 per week, someone with a salary of £30,000 would suffer a 77% fall in income.
If you lost your income how would you continue to meet your monthly outgoings without any sickness insurance?
Your Key Options
Choose your level of cover
Depending on the insurer, it is possible to cover anywhere from 50% to 70% 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 7 days to 12 months.
Choose your payout length
Short-term plans can payout for a maximum of 24 months and 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.
Sam was knowledgeable and attentive and spent a long time explaining and working out what Income Protection insurance would be best for me.Elizabeth Owen
What is director income protection insurance?
It is designed for either shareholding directors or non-shareholding executives looking to protect their earnings from the financial risk of sickness or injury.
Directors income protection allows you to protect your monthly earnings and family savings form the risk of sickness or injury.
The policy pays out a monthly benefit should you be unable to work due to practically any medical condition. This form of earnings policy is very comprehensive, covering health conditions ranging from cancer and heart disease to stress and backache.
Personal or executive policy?
With this type of cover there are two very distinct options. The first option is for a personal plan where you pay the premiums directly. The second option is for an executive plan where the business pays the premiums on your behalf.
With the executive option any payout from the plan would go to the business. With executive plans it is also possible to cover both employer pension and National Insurance contributions.
How does it work?
How much income can I protect?
With the personal option you are able to insure up to 65% of your gross (pre-tax) earnings. For shareholding directors earnings are measured as gross salary plus dividends (the benefit payable would be free from income tax). Under an executive policy you would be able to insure up to 80% of gross earnings (as income tax would be payable on any benefit paid).
For how long will my income be protected?
Policies usually have a minimum term length of 5 years and can run until the age of 70 years, although it makes sense to time the end date of the policy with your expected retirement age. This means that if you were to suffer a serious illness or injury and were unable to return to work the policy could pay you a monthly benefit for the rest of your working life. It is also possible to make multiple claims over the life of the policy for either the same condition or a completely different condition.
Key Policy Options
Setting your deferred period
How long you decide to set the deferred period on your directors income policy will depend on three main factors, consisting of your sick pay entitlement, your current savings and your budget for the plan.
It is usually best to set the deferred period equal to the length of time you receive full company paid sick pay so that your executive income plan will kick-in when your sick pay ends. However, plans with longer deferred periods often 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.
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 an income 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%.
Index benefit for inflation
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 sticks 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.
With your directors income insurance plan it is possible to index 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).
Dividend income protection
If you are a shareholding 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 between 50 and 65 per cent of your gross salary and dividends, depending on which insurer is considered.
In order to cover dividends you must be a shareholding 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.
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. Thus, if your earnings have fluctuated over the last three years or you expect them to do so in the future this can have a big impact on the most suitable choice of insurer.
Income insurance and taxation
There are two possible methods of paying the premiums on your plan. Under a personal plan the premiums are paid out of your personal bank account, in which case you would pay Insurance Premium Tax (IPT) on the monthly premiums paid but the payout from the policy would be tax-free, which is why you are able to insure up to 65% of your gross monthly earnings.
Under an executive policy, it is possible to allow your company to pay the monthly premiums in the form of a business expense. Although the premiums can therefore be off-set against corporation tax the benefit payable from the policy would be subject to income tax as the benefit would be paid through the company (either by PAYE or Schedule D). In this instance, in order to align take home pay, it is possible to insure up to 80% of your gross pay.
The group income protection option
If there are a number of directors and/or employees you would like to cover it is possible to take out one plan to cover everyone. Group income protection schemes usually form part of a decent employee benefits package, along with life and health insurance. With this set-up the business would pay the premiums and the benefit would be paid to the business, who would then redistribute the benefit to the incapacitated scheme member.
In order to take out a group plan it is usually necessary to cover at least three people, which can be formed of directors and employees. For larger groups the average premium per person naturally comes down due to economies of scale and the pooling of risk associated with covering more individuals.
For more information please see the dedicated Drewberry Group Income Protection webpage.
Tax efficient life insurance for directors
If you are a director of a limited company and you are not covered under a group scheme you may want to consider relevant life policy, which is a tax efficient means for directors to take out life cover relative to a personal plan.
With relevant life cover the policy is owned by your business and can usually be put through as a business expense (i.e. it is fully tax deductable). The policy is also placed in a special ‘relevant life trust’ so the benefit paid out is held outside of your personal estate for inheritance tax purposes.
Thus, rather than paying for life insurance out of after tax income it is possible to have your business pay the premiums and the benefit is still non-taxable (much like with group life assurance). Please speak to one of our advisers for more information.
Need some guidance
If you would like to run through your executive income insurance options (sometimes known as directors sickness insurance) with one of our advisers then please feel free to contact us on 0208 432 7333. Upon contacting us we would be able to provide you with a number of quotes so you can compare the difference in pricing between various policy options, and therefore make an informed decision.
Alternatively, if you know exactly what you are looking for then please submit your details in the quote box provided above to receive the most competitive quote from a panel of leading UK insurers.
Actual Income Protection Claims
The table below details real life stories of how an income protection policy has saved someone financially following an illness which left them unable to work.
The information is from Liverpool Victoria's 2011 claims, it demonstrates how anyone can lose their income, regardless of age, gender or occupation, LV's youngest claimant in 2011 was just 22 years old.
To provide expert financial advice and deliver a passionate 5-star service to help educate our clients so they can make informed decisions.
To help individuals and businesses throughout the UK to plan their financial future whilst protecting them against the financial risks they may face.
To provide quality financial advice in a transparent, friendly and professional manner.
Occupation Definition Calculator
Make sure your Income Protection covers you in your 'Own Occupation'!
Too often individuals take out income protection without being fully aware of the incapacity definition on which their plan would pay out.
Will the plan pay out if I am unable to do my current job role? Or will it only pay out if I am unable to do any occupation?
If you do not already have income protection this tool should provide you with guidance as to what to look out for and to ensure you do not fall foul of a lesser occupation definition.
Independent Protection Expert at Drewberry Insurance