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).
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.
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.
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.
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