Income Protection for Company Directors provides a monthly income should you be unable to work due to accident or sickness.
When you work for yourself, there’s little to no sick pay provision if you need to take time off work due to illness or injury which is why so many Directors turn to Income Protection.
According to consumer group Which?, Income Protection is the one policy every working adult should consider.
Income Protection is designed to pay out up to 80% of your combined salary and dividends if you can’t work through illness or injury.
It covers accidents, bodily injuries and periods of sickness and illness.
Essentially, any health condition that prevents you from working is covered (subject to any pre-existing medical history). Providing you opt for ‘own occupation’ cover, this will cover you if you can’t work in your specific role as a director of your limited company.
Quick Tip : Cover 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.
Income Protection has some automatic exclusions, as do most other insurance policies you can purchase.
These exclusions tend to be:
When deciding if Income Protection for Directors is worthwhile, it makes sense to weigh up the risk of something happening and the potential consequences.
14.7% of people aged 55+ had been out of work for at least 6 months at some point during their careers according to a recent Drewberry survey.
Meanwhile, there were more than 2 million people who are what statisticians call ‘economically inactive’ due to long-term sickness in the 3 months to January 2019.
Clearly, the risk of accidents and sickness keeping people from work, especially long-term illness, is higher than many people might first think.
For many company directors, government incapacity benefits, such as Employment and Support Allowance, simply can’t fully replace an income lost through illness or injury.
The average UK household spends northwards of £500 per week. However, Employment and Support Allowance starts at just £73.10 per week for the over-25s.
While other government benefits are available, these tend to depend on the severity of your disability and eligibility for them depends on your circumstances.
If you lost your income how would you continue to meet your monthly outgoings without sickness insurance?
A recent Drewberry survey found that 2 in 5 of us have no more than £1,000 in savings – just 2 weeks’ expenditure – to fall back on should the worst happen. How would you cope?
Director Income Protection is there to step in should this happen, replacing your income by paying out a monthly benefit into your company to be distributed to you during your time of need.
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 which can remove this risk and are worth considering as a new company director.
Independent Protection Expert at Drewberry
In our opinion, Unemployment Insurance for company directors is generally best avoided.
This is because the terms of such cover can make it very difficult for company directors to claim.
Payouts on Unemployment Insurance are triggered when you’re made forcibly redundant through no fault of your own – something that’s very difficult to prove when you’re your own boss.
Moreover, you have to be out of work entirely to be able to claim. This is problematic because, even where your limited company is in a fallow period, such as being between contracts, you’re still technically employed by the limited company.
As such, it can be quite difficult to make a claim on Redundancy Insurance as a company director. The risk of you not being able to claim when you need it is, in our opinion, too high to recommend it for those who run their own limited companies.
When setting up Director Income Protection, there are four major choices to make which will have a significant impact on the cost of cover:
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.
Independent Protection Expert at Drewberry
When buying Income Protection, you have three options to choose from when it comes to type of premiums:
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 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.
So where an architect with a hand injury may not be able to do their own job, they may not necessarily be able to claim under a ‘suited occupation’ definition because have the skills and experience to do another job role suited to them.
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.
Independent Protection Expert at Drewberry
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.
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.
You are able to insure up to 80% of your gross salary and dividends, depending on which insurer is considered.
Requirements For Covering Dividends
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.
Note that some insurers will base the maximum amount of cover allowable on an average of the last 3 years earnings, whereas other insurers will base cover on earnings over the previous 12 months.
This can have a big impact on the suitability of each insurer if your income fluctuates.
Independent Protection Expert at Drewberry
Before getting started, you should have a good idea of the level of protection you require, such as:
You’ll also have calculated a rough monthly budget and be aware of all the ways you can adjust a policy to suit your needs and reduce premiums without necessarily compromising on cover if needed.
Once you have a good understanding of the basics that will underpin your policy, you can go ahead and compare income protection quotes from the entire UK market to find the best deal.
You should be aware that the cheapest policies may not necessarily be the best – they may have reviewable premiums, for example, or only pay out for 1 year per claim, which could not be sufficient if you were to suffer a long-term illness.
If you’re at all unsure about the suitability of a policy, please don’t hesitate to ask an adviser to step in and discuss how it could suit your needs.
Once you’ve selected a policy that meets your needs, you’ll need to apply with the insurer.
At Drewberry we know laborious forms and paperwork are the last thing anyone wants to do, so we do the application with you over the phone.
The application involves an interactive medical questionnaire. We’ll ask you a series of questions about your past medical history which the insurer will then use to determine the level of risk you represent.
If, based on your answers, you’re accepted by the insurer on what’s known as ‘standard terms’, where nothing significant has been disclosed, you can usually get an instant online decision and cover can begin straight away.
Sometimes a policy may need to go to underwriting, however, if you’ve disclosed a particular medical condition or the financial benefit you’re applying for is in excess of the insurer’s limit for non-underwritten applications.
Here your application is assessed by the insurer’s internal medical underwriting team and terms will be issued to you in due course.
We take care of any final paperwork required to get the policy live and you start paying premiums.
From that point onwards, you’re covered for accidents and illnesses that prevent you from working for longer than your chosen deferred period.
You develop an injury or illness that impedes your ability to work. After receiving an official diagnosis from a medical professional, you’re signed off as unable to work until you’ve recovered.
Submitting A Claim
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.
Paying A Claim
Should the insurer approve your claim, they will begin providing you with monthly benefits at the end of your agreed deferred period.
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.
Until you reach the end of your policy’s life, long-term cover allows you to make as many claims as you need to for as long as you need to without impacting the price of the policy.
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 some further tests Neil was diagnosed with stage 2 Bowel Cancer and needed to make a claim.
The cost of sickness insurance for company directors depends on a variety of factors, most of which are policy factors discussed above.
However, there are also some personal factors that impact the cost of Income Protection, such as:
To help provide you with an idea of the cost we’ve put together a table with an average figure for three company directors of various different ages.
To come up with these figures, we’ve assumed:
The prices in the table below reflect the cheapest deal for company directors from across the UK market that match the above criteria.
Don’t forget, given the policy can be owned by your business the premiums are also paid for by your company.
While a personal Income Protection policy does not require you to pay tax on your benefits, the benefit from a company paid Income Protection policy will be taxed upon a claim.
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 owned and paid for by the policyholder’s company.
However, despite the company paying for the policy, it’s not usually classed a a P11D or benefit in kind.
As the company owns and pays for the premiums, the benefit is taxable should a claim because there has been no taxed paid on the policy premiums.
If a director claims on their Income Protection Insurance, 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 to take into account the fact that there’s tax on the benefit.
Directors’ Income Protection works in much the same way as a standard personal policy. The main difference between the two is who pays for the policy and how much cover is required.
While specialist Income Protection for Directors is normally favoured, it’s also perfectly reasonable for directors and business owners to purchase a personal policy instead.
Income Protection policies for Directors can cover 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. A Director Income Protection policy requires the business to arrange the distribution of any benefit payments that are paid to the company and they will be taxed in the process as income.
If there are a number of directors and / or employees you would like to offer protection to, Group Income Protection 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 fall ill or are 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 usually require at least five 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.
If you feel a group scheme may be more appropriate please do not hesitate to pop us a call on 02084327333 or email email@example.com.
Our Employee Benefits team are on hand to answer any questions you may have.
Head of Employee Benefits
While currently only Aegon and Unum offer specialist Income Protection for company directors, the rest of the top insurers offer personal policies that can be tailored to your needs.
Aegon was founded as Scottish Equitable in 1831 in Edinburgh and is still headquartered in the city. Dutch insurer Aegon N.V. bought a 40% stake in Scottish Equitable in 1994 and became a 100% stakeholder in 1998.
Unum is an insurance giant founded in the US in 1970.
Aviva covers all policyholders with an own occupation definition of incapacity and, if you choose to return to work in a different occupation until you are well enough to return to your pre-incapacity occupation, Aviva will top up your reduced income with Back to Work Benefits.
L&G Accident & Sickness Insurance comes with a free life cover element that pays out a maximum of 12 times your monthly benefit if you pass away while the policy is in force.
Royal London was founded in 1861 as a friendly society and went on to become a mutual society in 1908. It’s now the UK’s largest mutual life, pensions and investment company.
Vitality provides a unique offering. While the core of its policy is similar to other providers’ offering, it also offers a unique set of additional benefits to those who participate in the Wellness / Optimiser programs that can include policy discounts and rewards.
Because of how it’s taxed, Income Protection for company directors is more complicated than a personal policy. As such, we highly recommend getting expert advice in this area.
We started Drewberry because we were tired of being treated like a number and not getting the service we all deserve when it comes to things as important as protecting our health and our finances. Below are just a few reasons why it makes sense to let us help.
Income Protection is confusing enough without the added complexity of taking tax into account when the policy is paid for by your company.
We are here to help, please do not hesitate to pop us a call on 02084327333 or email firstname.lastname@example.org.
Head of Protection Advice at Drewberry
I had the pleasure of dealing with Jake Mills in organising my insurance. Jake was fantastic to deal with — his patience and understanding really helped.