How Does Income Protection for Executives Work?
Executive Income Protection is designed to protect an employee of a limited company. It will pay out a regular monthly benefit should the employee be too ill or injured to continue working.
These benefits cover a percentage of the employee or director’s pre-tax earnings to help them cover essential bills and everyday expenses while they are recovering.
Just like personal Income Protection, you’ll have four major choices to make when it comes to taking out cover that will significantly impact the cost:
- Level Of Cover
Depending on the insurer and the type of cover you pick (i.e. Executive 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.
- Deferred 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. Moreover, longer deferred periods are usually the most cost-effective when it comes to Executive Income Protection.
- Length Of Policy
This is the age the protection ends. Most people align it to the age where they anticipate retiring from the business. While many providers run policies all the way up to the age of 70, this will be significantly more expensive than cover which stops at age 60, for example.
- Payout Period
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 your policy cease age.
Choosing the Best Premiums for You
There are three options to choose from when it comes to type of premiums for Executive Income Protection.
- Reviewable premiums
Are ‘reviewable’ as the insurer sees fit and so can rise in a variety of circumstances, such as if if the insurer has seen an increase in claims or based on economic factors. Reviewable premiums usually start out cheaper but are reviewed upwards and then tend to work out more expensive across 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 policy lifespan, especially if you take out a long-term policy cover when you’re young and healthy, as premiums are locked in from the start and can’t change with time.
Choosing the Right Definition of Incapacity
This refers to 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:
Own Occupation Cover
Own occupation cover is generally see as the ‘gold standard’ of Income Protection because it means that you can claim as long as your injury or illness prevents you from working in your specific job role.
For example, an executive director who runs their own architecture firm who 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 receive a payout, you need to be unable to undertake your current job role or any other role for which 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.
It’s possible to index link your chosen benefit so that the monthly sum assured 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 monthly benefit set at the start of the plan, the real value of this benefit would be eroded over time by inflation as the price of goods and services gets more expensive as the years go on.
By indexing the policy, you ensure that your benefit keeps up with inflation across the policy’s entire term. As a result, your premiums will also rise by at least the level of inflation each year to take into account the increased benefit you’ll receive.
How to Set Up Executive Income Protection
As a company executive, insurers 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 and the type of cover you choose.
In order to cover dividends, it must be noted that you need to 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 :: Calculate the Protection You Need
Before getting started, it’s important to get a good idea of the level of protection you require, including:
- 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 how you can adjust a policy to suit your needs and reduce premiums without necessarily compromising on cover if required.
Do Your Earnings Fluctuate?
Many company directors see their income fluctuate, especially in the early years. Be warned, different insurers base their assessment of your income on different metrics.
Some insurers will base the maximum amount of cover on an average of the last 3 years earnings, whereas other insurers will base it on earnings over the past 12 months.
Step 2 :: Compare Accident & Sickness Quotes Online
After gaining a thorough understanding of the basics that will form the bedrock of 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 whether it might suit your needs.
Step 3 :: Apply for the Policy
Once you’ve selected a policy that meets your needs, you’ll need to apply for it.
At Drewberry we know everyone hates laborious forms and paperwork, so we do the application with you on the phone.
The application involves an interactive medical questionnaire – essentially, it’s 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 the last loose ends in terms of paperwork to get the policy live and you start paying premiums.
From that point onwards, you’re covered for accidents and sickness that prevent you from working for longer than your chosen deferred period.
Of course, while it’s possible to do all this work yourself it can be a major plus to have an expert in your corner who knows the market inside out and is therefore well placed to get the best deal for you.
How Do I Make A Claim?
The first thing to do if you suffer an illness or injury that you feel will keep you out of work for longer than your deferred period is to notify your insurer immediately.
While you won’t be able to claim your benefits until the end of your deferred period, it’s essential that you make your claim as soon as you take leave from work so that your insurer can organise the claim and keep track of how long it has been since you stopped working.
When you make a claim, you will need to provide your insurer with a completed claims form and evidence of your health condition which prevents you from working, which is usually given in the form of a note from your GP.
Other evidence required might be in the form of notes from specialists / consultants or copies of diagnostic tests / scans. These should all be held within your medical records, which the insurer may write to your GP for permission to see.
Once you’ve been out of work for longer than your deferred period, you’ll begin to receive a tax-free monthly income from the policy until either:
- You’re well enough to return to work
- You reach the end of your claims period (1, 2 or 5 years for short-term policies)
- Or the policy ends (typically at retirement, for long-term cover).