Income Protection For Company Directors

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09-05-2021

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.

Income Protection for Company Directors provides a replacement monthly income should you be unable to undertake your current work due to accident or sickness.

Directors can pay for policies through their limited companies, which usually offers tax savings over a personal plan.

  • 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, loans/credit cards, 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.

Opting for Income Protection is the most comprehensive way to protect your income. As a fully medically underwritten policy it is there to protect you when you need it most.

In 2019 leading insurers Zurich and Vitality paid out over 96% of valid Income Protection claims.

EXPERT TIP 🤓
According to consumer group Which?, Income Protection is the one policy every working adult should consider.

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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 and bodily injuries
  • 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.

Does It Cover Pre-Existing Conditions?

When you apply for cover, your insurer asks a set of medical questions. These focus on your health, particularly over the past 5 years. If you disclose a medical condition, your insurer might:

  • Cover the condition on standard terms
  • Cover the condition for an additional premium
  • Exclude the condition but offer a date at which it will consider reviewing the exclusion
  • Exclude that condition entirely (perhaps with a premium discount to compensate).

If you have any health conditions it is best to discuss your situation with an expert to ensure you get the most appropriate cover.

If you need help please don’t hesitate to pop us a call on 02084327333 or email help@drewberry.co.uk.

Are There Any Exclusions?

As with most insurance policies, there are a few automatic exclusions which apply to everyone. For instance, most policies don’t pay out for illnesses or injuries sustained:

  • 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.

Other than these, there are few standard exclusions. Instead, your insurer determines what you’re covered for based on your pre-existing medical history.

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.

Why Is Director Income Protection Important?

Working for yourself has plenty of benefits and perks. Running your own business means you get to be your own boss, setting your own hours and working as you please.

However, there are some downsides. For instance, many of our clients who are solo company directors don’t get much in the way of sick pay provisions from their business.

What other means of support are available to directors if you fall ill and couldn’t do your job?

Do Company Directors Get Statutory Sick Pay?

Company directors are employees, so most are entitled to Statutory Sick Pay. This stands at £95.85 per week. Your employer — i.e. your limited company — pays this for up to 28 weeks. However, few small companies offer their directors paid sick leave above this.

Even where you have considered paying sick pay, if your business relies on you being well enough to work and generate revenue there may be a shortage of funds within your company to pay you if you’re unwell.

What About State Benefits?

One of the main government incapacity benefits is Employment and Support Allowance (ESA). This starts at £74.35 per week for the over-25s depending on the severity of your disability.

For many company directors, ESA simply wouldn’t fully replace their usual income if they were ill or injured.

While other state benefits are available, these usually depend on the severity of your disability and eligibility for them depends on your circumstances.

Could I Rely on My Savings?

A Drewberry survey found that 2 in 5 Britons have no more than £1,000 in savings put aside for a rainy day.

Given the average UK household spends almost £600 per week, this means a sizeable proportion of us have less than 2 weeks of outgoings to fall back on should the worst happen.

Why Self Employed Finance Blogger Chose Income Protection…

Indeed, it’s why self employed personal finance author and blogger Mrs Mummypenny took out Income Protection. She sought out the valuable peace of mind having it in place can offer.

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.

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.

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.

How Much Does Income Protection Cost For Directors In 2021?

It is important to recognise that 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 for three company directors of various different ages.

To calculate 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 income protection premiums for company directors from across the UK market that match the above criteria.

Age 25

Age 35

Age 45

£30.73

£40.22

£58.42

Don’t forget, given the policy can be owned by your business the premiums are also paid for by your company.

How Is It Taxed?

When you buy personal Income Protection — i.e. cover you pay for from your individual bank account — the insurer pays the benefit tax-free if you claim. This is because you’ve already paid tax on the money you’ve used to pay premiums.

However, with Director’s Income Protection, your limited company pays the premiums. HMRC usually grants your company corporation tax relief on these premiums, so you don’t effectively pay tax on them.

As such, HMRC taxes the benefit to compensate. Firstly, in the event of a claim, the insurer pays the benefit into your company, as the company is the owner of the plan. It’s then up to you to distribute these funds tax-efficiently in consultation with your accountant.

When you distribute the benefit from your company as income HMRC taxes the payout at this point, similarly to how it taxes your earnings.

Grossing Up Your Benefit

To compensate for the fact HMRC taxes the benefit, insurers let you protect a higher proportion of your earnings — up to 80% — with Director’s Income Protection. This is compared to a maximum of 70% with a personal plan.

Is Director Income Protection a P11D / Benefit in Kind?

P11D benefits in kind are certain benefits an employer offers its workers. HMRC taxes workers on these benefits. Some insurance policies, such as Health Insurance, are benefits in kind, while others aren’t.

It’s our understanding that, even though your company pays for the plan, HMRC does not consider Income Protection for company directors a P11D / benefit in kind.

How To Make A Claim? Will It Pay Out?

If you are going to invest in sickness insurance it is important to know that it will pay out when you need to use it.

We have a claims team to support you through this process to make it as smooth as possible so you can focus on your recovery. The general process you follow when making a claim are:

  • You develop a health problem that stops you working.
  • You contact your insurer as soon as you can’t work.
  • Fill in a claims form— most providers let you do this online. Also expect to provide evidence of your illness or injury, for example a doctor’s note or diagnosis from a consultant.
  • If your provider approves your claim and you’re still too unwell to work at the end of your deferred period, your insurer starts paying your monthly benefit.
  • You receive the benefit until you recover and return to work, reach your claims limit (for short-term protection), or reach your cease age.

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

Do Insurers Pay Their Claims?

We run an annual protection survey to find out what the UK public think about protecting their finances.

Each time the results come in we find that most people heavily underestimate just how many claims get successfully paid out 🙈.

Below is a table of the top UK insurers and their successful payout rates for the last few year. As you can see most insurers are paying out well over 90% of claims.

Insurer

2017

2018

2019

Aegon

92.1%

93%

100%

Zurich

87%

95%

98%

Vitality

96%

97.8%

96.4%

Shepherds Friendly

96%

95.8%

96.3%

Cirencester Friendly

94.7%

95.2%

95.7%

Holloway Friendly

96%

98%

94%

British Friendly

92.4%

94.7%

94%

Liverpool Victoria

96%

95%

93%

The Exeter

91%

93%

91%

Aviva

88.8%

86.3%

85.7%

Legal & General

95%

95%

82%

Payout statistics alone should not be used to decide which insurer offers the best Income Protection.

Instead, payout rates should be used as a rough guide to compare successful claims across the industry as a whole.

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.

Nadeem Farid Head of Employee Benefits at Drewberry

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

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.

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Common Director Income Protection Questions

  • How Long Before I Can Claim Income Protection?

    With Income Protection there’s no initial qualifying period. That means if you take out cover and are unfortunate enough to become ill / injured the following day, you’re covered.

    However, there is the deferral period to consider. This refers to how long you need to be out of work before you can make a claim and is decided when you first set-up your policy.

    The deferral period can be as short as 1 week or as long as 6 months, you decide when you set-up your policy. Should a claim arise you will start receiving your monthly benefit once you have been out of work longer than your chosen deferred period.

  • Is Executive Income Protection A P11D benefit?

    No, Executive Income Protection is not typically considered a P11D / benefit in kind. That means there’s no additional tax to pay as a result of having a policy as a company director.

  • Can You Claim Income Protection More Than Once?

    Traditional long term Income Protection is designed to protect your earnings throughout your working life.

    You are able to make as many claims as you need to. Any time you find yourself too ill or injured to work you are able to make a claim.

  • Can Contractors Get Director Income Protection?

    Many contractors choose to work through their own limited company and with no employer provided sick pay it means Income Protection is often even more important.

    So long as the contractor is working through a limited company they can choose to take out Director Income Protection and the premiums can be paid for by their limited company.

    If the contractor is a soletrader they would be required to set-up a personal Income Protection policy and the premiums would be paid out of their net income.

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Which Is The Best UK Income Protection For Directors In 2021?

There are three major insurers offering Income Protection for company directors:

However, if none of these are suitable, there’s also a wide market for personal policies that you pay for as an individual, out of your own bank account.

Use the links below to navigate to our expert review for each of the insurers we work with. For our comprehensive guide to the best income protection policies in the UK you can click here

Note that Aegon and Legal & General offer both personal cover and cover for directors that your limited company can own and pay for.

Be aware that it’s not always the cheapest plan that’s the best — policies and providers vary considerably. One might offer a great deal more coverage than the other, so it pays to shop around.

You can use our income protection quote tool to compare premiums from all the top UK insurers →

Additional Benefits & Support Services

Another important area of comparison is the additional benefits on offer from various Sickness Insurance providers. These are services available, almost always for free, alongside Sick Pay Cover.

Insurers have designed many such benefits with overall wellness in mind. You can therefore use them to reduce the chances of you needing to claim or to help speed up your recovery if you are ill.

Additional benefits may include:

  • Remote GP appointments
  • Medical helplines, offering convenient telephone access to trained doctors and nurses for advice on minor medical ailments
  • A fixed number of physiotherapy sessions per year (either online or in person)
  • A fixed number of counselling / cognitive behavioural therapy sessions per year (either online or in person)
  • High street discounts
  • Discounts on gym memberships / fitness trackers
  • Hospitalisation benefit, paying out a cash benefit each day you spend as an inpatient in hospital
  • Second medical opinion service, providing access to world-leading medical experts to offer a second opinion on a diagnosis or course of treatment.

Many such services are available to not only you as the policyholder but also your immediate family, such as your spouse / civil partner or dependent children.

Compare Director Income Protection Quotes & Get Expert 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.

We all deserve a first class service when it comes to issues as important as protecting our health and our finances. Below are just a few reasons why it makes sense to talk to us.

We are here to help, please do not hesitate to pop us a call on 02084327333 or email help@drewberry.co.uk.

Very helpful from start to finish. Talked through all the points and gave great advice.

Darren Comer
16/05/2021
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