How Does Sickness Insurance For Directors Work?
When taking out comprehensive income protection it is important you get it right.
There are a number of policy terms you need to understand and some questions you need to answer to ensure you get the most suitable cover.
How Much Cover Do You Need?
Depending on the insurer and the type of cover you pick, it is possible to receive anywhere from 50% to 80% of your gross (pre-tax) salary and dividend income as a benefit each month.
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.
Rather than simply opting for the maximum amount of cover you are best considering your core financial outgoings and using this figure to decide upon your level of cover. The more you wish to cover the higher your monthly premiums.
Covering Your Partner’s Dividends
Some insurers will also let you top-up your cover with your partner’s dividends if they hold a non-revenue generating role within your business.
Setting Your Deferred Period
The deferred period is the length of time you must be unable to work before the policy starts paying out.
Deferred periods can range from 1 week to over a year. It is important to work out how long you can survive on any sick pay or savings before you need the policy to kick in.
Longer deferral periods reduce premiums notably compared with shorter ones.
How Long Do You Need Cover For?
This is the age the cover will end. Most people align it to the age where they anticipate retiring from the business. Many providers run policies all the way up to the age of 70, but this will be significantly more expensive than cover which stops at age 60, for example.
Short Term Or Long Term Cover?
Short-term plans pay out for a maximum of 1, 2 or 5 years per condition per claim, whereas long-term policies can continue paying out either until you are well enough to return to work or you reach the end of the policy term (typically set to your expected retirement date).
While short-term protection for 1, 2 or 5 years may sound like a long time, in reality there are a number of serious illnesses that may last longer than this or even prevent you from ever working again.
As such, we tend to recommend long-term protection where possible so long as you can afford comprehensive cover.
Do I Need To Index Link My Policy?
With Director Income Protection Insurance it’s possible to index link your chosen level of benefit so that the monthly sum insured increases each year in line with 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 would be eroded over time by inflation.
Indexing the policy allows you to ensure that your benefit keeps up with inflation over the policy’s term.
Age-Banded Or Guaranteed Premiums?
When buying Income Protection, you have three options to choose from when it comes to type of premiums:
- Reviewable premiums
Can be ‘reviewed’ as the insurer sees fit, which means that they may rise in a variety of circumstances, e.g. if the insurer has seen an increase in claims or based on economic factors.
Reviewable premiums usually start out cheaper but are then reviewed upwards and therefore tend to work out more expensive over the life of the policy.
- Age-banded premiums
Also work out cheaper to begin with but then steadily rise each year. Unlike reviewable premiums, however, age-banded premiums can only rise by a preset amount laid out in your policy documents. These increases are solely linked to your age and the increasing risk of you claiming as you get older.
- Guaranteed premiums
Work out more expensive initially, but cannot be adjusted over the life of the policy unless you yourself make any changes to the plan.
This generally means guaranteed premiums work out cheaper over the life of the policy, especially if you take out cover when you’re young and healthy, as premiums are locked in from the start and can’t change with time.
The Importance Of Own Occupation Cover
The definition of incapacity is important as it’s how the insurer will determine whether or not you are fit to work and therefore able to make a claim.
There are three main definitions of incapacity to consider with Income Protection:
Own Occupation Cover
Own occupation cover means that you will be entitled to your benefits as long as your injury or illness prevents you from working in your specific job role.
For example, a company director who runs their own architecture business and injures their hand wouldn’t be able to complete technical drawings and so could make a claim.
Policies that use a suited occupation definition of incapacity mean that in order to claim benefits, you have to be unable to undertake your current job role or any other job where you may have experience or education to perform.
Any Occupation / Work Tasks
This is a definition of incapacity that means you can only claim if you’re so totally unfit to work that you can’t work in any occupation / perform a set number of tasks required at most basic jobs.
This definition of incapacity is the most difficult to claim on and in general we’d recommend it’s best avoided.
At Drewberry we generally recommend the own occupation definition for most clients because it’s the easiest to claim on should you become ill or injured.
However, if you’re not sure about which definition of incapacity is right for you please don’t hesitate to pop us a call on 02084327333.