Director Income Protection

It is designed for either shareholding directors or non-shareholding executives looking to protect their earnings from the financial risk of sickness or injury.

Directors income protection allows you to protect your monthly earnings and family savings form the risk of sickness or injury.

The policy pays out a monthly benefit should you be unable to work due to practically any medical condition. This form of earnings policy is very comprehensive, covering health conditions ranging from cancer and heart disease to stress and backache.

With this type of cover there are two very distinct options. The first option is for a personal plan where you pay the premiums directly. The second option is for an executive plan where the business pays the premiums on your behalf.

With the executive option any payout from the plan would go to the business. With executive plans it is also possible to cover both employer pension and National Insurance contributions.

How much income can I protect?

With the personal option you are able to insure up to 65% of your gross (pre-tax) earnings. For shareholding directors earnings are measured as gross salary plus dividends (the benefit payable would be free from income tax). Under an executive policy you would be able to insure up to 80% of gross earnings (as income tax would be payable on any benefit paid).

For how long will my income be protected?

Policies usually have a minimum term length of 5 years and can run until the age of 70 years, although it makes sense to time the end date of the policy with your expected retirement age. This means that if you were to suffer a serious illness or injury and were unable to return to work the policy could pay you a monthly benefit for the rest of your working life. It is also possible to make multiple claims over the life of the policy for either the same condition or a completely different condition.

Setting your deferred period

How long you decide to set the deferred period on your directors income policy will depend on three main factors, consisting of your sick pay entitlement, your current savings and your budget for the plan.

It is usually best to set the deferred period equal to the length of time you receive full company paid sick pay so that your executive income plan will kick-in when your sick pay ends. However, plans with longer deferred periods often come with significantly lower monthly premiums and you may therefore wish to set a longer deferred period if you have a level of savings that you could use to support yourself before the plan begins.

A deferred period is the period of time you would need to be off work before the plan begins to pay a monthly benefit, and ranges from 4 weeks to 52 weeks. Moving from an income plan with a deferred period of 4 weeks to one with a deferred period of 26 weeks could lower your monthly premiums by as much as 50%.

Index benefit for 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 level would be eroded over time by inflation. If the Bank of England sticks to its inflation target then your monthly benefit would be eroded by around 2% per annum, which would mount up over the life of the policy.

With your directors income insurance plan it is possible to index your chosen level of benefit from the outset of the policy so that the monthly sum insured increases each year in-line with inflation. For the purposes of indexation the level of inflation each year is measured relative to the Retail Price Index (RPI).

If you are a shareholding director of your own business insurers will allow their definition of earnings to include dividend payments from the business to you. This means that you are able to insure between 50 and 65 per cent of your gross salary and dividends, depending on which insurer is considered.

In order to cover dividends you must be a shareholding 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.

It is very important to note that some insurers will base the maximum amount cover allowable on an average of the last three years earnings if cover is required for dividends, whereas other insurers will base cover on earnings over the previous 12 months. Thus, if your earnings have fluctuated over the last three years or you expect them to do so in the future this can have a big impact on the most suitable choice of insurer.

There are two possible methods of paying the premiums on your plan. Under a personal plan the premiums are paid out of your personal bank account, in which case you would pay Insurance Premium Tax (IPT) on the monthly premiums paid but the payout from the policy would be tax-free, which is why you are able to insure up to 65% of your gross monthly earnings.

Under an executive policy, it is possible to allow your company to pay the monthly premiums in the form of a business expense. Although the premiums can therefore be off-set against corporation tax the benefit payable from the policy would be subject to income tax as the benefit would be paid through the company (either by PAYE or Schedule D). In this instance, in order to align take home pay, it is possible to insure up to 80% of your gross pay.

If there are a number of directors and/or employees you would like to cover it is possible to take out one plan to cover everyone. Group income protection schemes usually form part of a decent employee benefits package, along with life and health insurance. With this set-up the business would pay the premiums and the benefit would be paid to the business, who would then redistribute the benefit to the incapacitated scheme member.

In order to take out a group plan it is usually necessary to cover at least three people, which can be formed of directors and employees. For larger groups the average premium per person naturally comes down due to economies of scale and the pooling of risk associated with covering more individuals.

For more information please see the dedicated Drewberry Group Income Protection webpage.

If you are a director of a limited company and you are not covered under a group scheme you may want to consider relevant life policy, which is a tax efficient means for directors to take out life cover relative to a personal plan.

With relevant life cover the policy is owned by your business and can usually be put through as a business expense (i.e. it is fully tax deductable). The policy is also placed in a special ‘relevant life trust’ so the benefit paid out is held outside of your personal estate for inheritance tax purposes.

Thus, rather than paying for life insurance out of after tax income it is possible to have your business pay the premiums and the benefit is still non-taxable (much like with group life assurance). Please speak to one of our advisers for more information.

If you would like to run through your executive income insurance options (sometimes known as directors sickness insurance) with one of our advisers then please feel free to contact us on 0208 432 7333. Upon contacting us we would be able to provide you with a number of quotes so you can compare the difference in pricing between various policy options, and therefore make an informed decision.

Alternatively, if you know exactly what you are looking for then please submit your details in the quote box provided above to receive the most competitive quote from a panel of leading UK insurers.