Director Income Protection

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.

• Protect up to 80% of both your salary and dividend drawdown from your company.
• The policy can be owned and paid for by your limited company.
• Designed to cover your regular financial commitments such as your mortgage/rent, food and bills.
• Choose a policy which will pay out from as short as 1 week of illness or injury.
• Protect your income right up until your expected retirement age.
• In 2018, leading insurers Liverpool Victoria and Legal & General both paid 95% of valid Income Protection claims.

What Does Income Protection for Directors Cover?

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.

What Doesn’t Income Protection Insurance Cover?

Income Protection has some automatic exclusions, as do most other insurance policies you can purchase.

These exclusions tend to be:

• Illnesses / injuries that occur in pursuit of criminal acts
• Illnesses / injuries as a result of illegal or illicit drugs, or as a result of alcohol / substance abuse
• Illnesses / injuries that occur as part of travel to countries with political instability, areas of active conflict, high terrorism risk, that the Foreign Office has advised against travel to, or where there are active epidemics.

Do I Need Company 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 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.

The Consequences:

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.

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.

Victoria Slade
Independent Protection Expert at Drewberry

Should I Add Unemployment Insurance?

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.

How Does Director Sickness Insurance Work?

When setting up Director Income Protection, there are four major choices to make which will have a significant impact on the cost of cover:

• Your level of cover
  Depending on the insurer and the type of cover you pick (i.e. Director Income Protection vs personal cover), it is possible to receive anywhere from 50% to 80% of your gross (pre-tax) salary and dividend income as a benefit each month.
• Your deferral period
  How long you need to be off work before the policy starts paying out. Longer deferral periods reduce premiums notably compared with shorter ones, with longer deferred periods generally being the most cost-effective when it comes to Directors Income Protection.
• Your policy cease age
  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.
• Your payout length
  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.

Michael Barrow
Independent Protection Expert at Drewberry

Choose Your 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.

Choose Your Definition of Incapacity

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.

Suited Occupation

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.

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.

Samantha Haffenden-Angear
Independent Protection Expert at Drewberry

Indexation

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.

Setting Up 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.

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.

Sam Barr-Worsfold
Independent Protection Expert at Drewberry

Step 1 :: Figure Out What Protection You Need

Before getting started, you should have a good idea of the level of protection you require, such as:

• Income you’ll require each month (and which insurers will be able to provide you with that required income based on your earnings)
• How long you’d need that benefit for (e.g. for the short-term for 1, 2 or 5 years per claim or for the long-term, which will pay a benefit right up until retirement if necessary)
• Policy cease age, usually aligned with expected retirement age
• How long you can wait before you need the cover to kick in (the deferred period).

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.

Step 2 :: Compare Accident & Sickness Quotes Online

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.

Step 3 :: Apply for the Policy

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.

Step 4 :: Application is finalised and you start paying premiums

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.

How to Make a Claim?

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’s Cancer Claim With British Friendly

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.

🤕 Read More About Neil’s Claim

The Cost & Taxation of Directors’ Income Protection

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:

• Your age
  The older you are at the start of the policy, the higher the cost of Income Protection
• Any health conditions you may have
  An insurer may look to increase the premiums if you have a health condition or simply exclude that condition outright
• Your smoker status
  Smokers are more likely to get ill, and to become seriously ill, due to the detrimental health impacts of smoking.

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 individual is a healthy office-based director
• They want a benefit of £2,000 a month
• They’re looking for a 13 week deferral period
• Their cease age will be age 65
• They’re looking for long-term cover
• They’ve opted to index their premiums by linking the benefit to RPI
• They want to guarantee their premiums for the life of the policy.

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.

How is Director Sickness Insurance Taxed?

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.

Personal or Company Paid Income Protection Insurance?

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.

Providing Income Protection for Employees

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 help@drewberry.co.uk.

Our Employee Benefits team are on hand to answer any questions you may have.

Nadeem Farid
Head of Employee Benefits

Compare Directors Income Protection

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

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.

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

Unum

Unum is an insurance giant founded in the US in 1970.

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

Aviva

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.

• Maximum coverage: 55% of your pre-tax salary, up to a maximum of £240,000 per year.
• Deferred periods: 4-104 weeks (104 weeks is the longest available deferred period for UK Accident & Sickness policies)
• Maximum entry age: 59
• Aviva offer Support Plus services with policies, giving policyholders access to Bupa Healthline, remote doctor services, counselling, and career support

Legal & General

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.

• Maximum coverage: 60% of your annual income before tax, up to a maximum of £200,000 per year.
• Deferred periods: 4 /13 / 26 / 52 weeks
• Maximum entry age: 60
• Legal & General have a death benefit which offers 12 times the monthly premium if you pass away during the policy term

Liverpool Victoria

• Covers up to 60% of your pre-tax earnings up to a maximum benefit of £12,500 per month
• Maximum entry age: 59 years
• Deferred period: 4 / 8 / 13 / 26 / 52 weeks
• Offers access to LV Doctor Services, which can be used remotely by phone or through an app and include convenient access to private prescriptions, remote GP services and contact with doctors and specialists for a second medical opinion.

Royal London

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.

• Maximum coverage: 65% of the first £15,000 income and 55% of the remainder, up to a maximum of £250,000 per year
• Deferred periods: 4 / 8 / 13 / 26 / 52 weeks
• Maximum entry age: 59
• Royal London Accident & Sickness Insurance can include Fracture Cover, which pays out a lump sum of between £1,500 and £4,000 on top of any benefit you’d receive for being off work if you receive a fracture of a specified body part

Vitality

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.

• Maximum coverage: 60% of your earnings capped up to £2,500 per month and 50% of any earnings above, up to a maximum of £16,666 per month
• Deferred periods: 1 week / 1 / 3 / 6 / 12 months
• Maximum entry age: 59
• Vitality are the only insurer currently on the market to offer the option to fix the whole benefit. By providing proof of your income when you apply for an Income Protection policy, Vitality will fix your benefit. If your income falls in the future, Vitality will still pay out your benefit in full without reducing it to account for you new salary.

Get Expert Director Income Protection Advice

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.

Why Speak to Us…

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.

• There is no fee for our service
• We are independent and impartial
  Drewberry isn’t tied to any insurance company, so we can provide completely impartial advice to make sure you get the most appropriate policy based solely on your needs.
• We’ve got bargaining power on our side
  This allows us to negotiate better premiums for you than you going direct yourself.
• You’ll speak to a dedicated expert from start to finish
  You will speak to a named expert with a direct telephone and email. No more automated machines and no more being sent from pillar to post – you’ll have someone to speak to who knows you.
• Benefit from our 5-star service
  We pride ourselves on providing a 5-star service, as can be seen from our 2335 and growing independent client reviews rating us at 4.92 / 5.
• Gain the protection of regulated advice
  You are protected. Where we provide a regulated advice service we are responsible for the policy we set-up for you. Doing it yourself or going direct to an insurer won’t provide this protection, so you won’t benefit from these securities.
• Claims support when you need it the most
  You have support should you need to make a claim. The most important thing when it comes to insurance is that claims are paid and quickly. We are here to support you during the claims process and make sure it’s as smooth and stress free as possible.

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 help@drewberry.co.uk.

Robert Harvey
Head of Protection Advice at Drewberry