Executive Income Protection

Income Protection for Executives protects your income should you suffer an accident or sickness that prevents you from doing your job and generating an income.

It is popular with Contractors and Directors working through their own limited company who have little or no sick pay entitlement should they be too ill or injured to work.

It is also used by larger companies wanted to offer a single employee Income Protection as an Employee Benefit.

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

What Does Executive Income Protection Cover?

With the ‘own occupation’ definition of incapacity, Income Protection is designed to pay out if you can’t do your specific job as an executive / company director.

It protects against any medical eventuality (subject to your pre-existing medical history) that prevents you from doing your job, including:

• Accidents and bodily injuries
• Illness and period of sick leave.

Quick Tip: Cover Your Partner’s Dividends
Some insurers will let you also cover your partner’s dividends if they hold a non-revenue generating role within your business (i.e. they wouldn’t continue generating revenue for the business if you were rendered incapacitated through accident or sickness).

What Doesn’t Sickness Insurance for Executives Cover?

As with all insurance, there are some automatic exclusions on these policies. These generally include:

• Self-inflicted injuries
• 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 this, there are no standard exclusions on Accident & Sickness Insurance. This means that any illness or injury that prevents you from working (providing it’s not a pre-existing condition) is covered.

Do I Need Executive Income Protection?

When deciding whether Executive Income Protection is worth it, you’ll need to weigh up the risk of something happening and the consequences if that stopped you earning.

For instance, did you know…

• 14.7% of people aged 55+ had been out of work due to accident or sickness for at least 6 months at some point during their careers according to a recent Drewberry survey
• More than 2 million people were what statisticians call ‘economically inactive’ due to long-term sickness in the 3 months to January 2019
• The average UK household spends more than £500 per week.
• Despite this, 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 isn’t guaranteed.

Overall, it’s unlikely that state benefits alone would cut it if an executive had to replace their income while off work sick. What’s more, it’s clear that the risk of illness and injury, especially long-term illness or injury, is far higher than many people may assume.

When Drewberry surveyed the general public, we found that 2 in 5 people had no more than £1,000 in cash savings (just 2 weeks’ household expenditure) to fall back on.

If any of this applies to you, how would you cope in such a situation?

Anyone leaving an employed role to strike out on their own really needs to consider the fact that they’re most likely leaving sick pay behind.

Fortunately, Income Protection which can reduce this risk and is definitely worth considering as a new company director.

Victoria Slade
Independent Protection Expert at Drewberry

Do I Need Unemployment Insurance?

In our expert opinion, Unemployment Cover for company executives and directors is best avoided.

This is because the terms on these policies can make it very difficult to make a successful claim if you do run your own business or significantly participate in the running of a limited company.

As an executive / company director, you need to be able to prove that you were made redundant through no fault of your own – something that’s very hard to prove when you’re your own boss.

You also need to prove that you had no advanced warning of the redundancy should it occur, again something that’s very difficult when you’re running the show.

Lastly, all employment needs to cease and you usually need to be claiming Jobseekers Allowance to make a claim. Even where your company is going through a fallow period, such as being between contracts, it’s highly unlikely you’ll be able to claim because you’ll still technically be employed by the limited company setup.

Generally speaking, we feel that the risk of not being able to make a successful claim on a Redundancy Insurance policy is too high to recommend this type of cover for clients who work for themselves.

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.

While short-term protection for 1, 2 or 5 years may sound like a long time, in reality there could be a number of serious illnesses that last longer than this or even prevent you from working ever again.

As such, we tend to recommend long-term protection where budget allows.

Michael Barrow
Independent Protection Expert at Drewberry

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.

Suited Occupation

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.

Indexation

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).

How Much Does Executive Sick Pay Insurance Cost?

The cost of sickness insurance for company executives 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.

As you can see there are many influences on the price of Income Protection, but 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 an 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.

It is important to remember that where Executive Sick Pay Insurance is owned by the limited company the premiums will also be paying the monthly premiums.

How is Executive Income Protection Taxed?

Where a personal policy is paid for from a personal bank account with income that’s already had income tax and national insurance contributions deducted, meaning the benefit can be paid tax-free, this is not the case with an executive policy.

Executive Income Protection is taxed on a claim because the premiums are paid for by the company before taxation.

When a claim is paid, the funds are paid into the business and then distributed to the employee or director in a tax-efficient manner. It is on distribution to the employee that the benefit is taxed as income, just as if you’d been receiving your usual remuneration from the company.

Given the tax on the benefit, you can insure a higher percentage of your gross drawdown with Executive Income Protection, to take into account the benefit will be reduced by taxation.

Under an Executive Income Protection policy, the policy is owned and paid for by your company. However, despite the company paying for the policy, it’s not usually classed a a P11D or benefit in kind.

Executive Income Protection or Personal Cover?

Income Protection for executives works almost identically to a standard personal policy. The main difference between the two is who pays for the policy and how much cover is required.

This specialised cover for executives and 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.

An Income Protection policy for executives is often the favoured option; however, it’s also common for directors and business owners to purchase personal policies instead.

If you claim on a personal policy, your Income Protection benefits will be delivered directly to you as a tax-free payment, whereas a director’s Income Protection policy requires them to arrange the distribution of the benefits that are paid to the company and they will be taxed in the process.

Consider Group Income Protection For More Employees

If there is more than one executive / director at your company, or you’d like to extend protection to your wider workforce, it may be better to consider Group Income Protection.

As a policy, this works very similarly to Executive Income Protection in that it’s owned and paid for by the business and benefits are paid back into the company to be distributed to employees from there.

The only real difference is that a group policy covers multiple workers at a company under the same plan.

You usually need to have a minimum of 3-5 members for a group policy to be viable, but if you’re looking to insure your wider workforce this is generally a good option to consider.

My team help businesses of all sizes set-up Group Sick Pay Insurance for their employees.

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

Nadeem Farid
Head of Employee Benefits at Drewberry

Compare Executive Income Protection Insurers

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 Advice on Executive Income Protection

There are a number of pitfalls to avoid when taking out cover but Executive Income Protection has the added complexity of the tax situation.

Working with an expert who can guide you through can give you the peace of mind knowing your policy is set-up correctly.

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 2372 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.

If it is all getting a little confusing and you need some help please do not hesitate to get in touch.

We are here to help. Pop us a call on 02084327333 or email help@drewberry.co.uk.

Tom Conner
Director at Drewberry