Answered by Andrew Jenkinson
In terms of the cover provided by executive income protection there is absolutely no difference to a personal income protection plan. Both policies provide long-term earnings cover against the risk of having to take time off work due to sickness or injury.
What is the difference?
The key difference is in how these two plans are set-up. A personal plan is simple, you would own the plan and pay the premiums from your own personal bank account. As tax is paid on the premiums the benefit paid out is usually free from income tax and national insurance contributions (NI).
However, an executive plan is often referred to as a ‘life of another’ policy as a business would pay the premiums and receive the benefit paid out, based on your life. The business would then pay the benefit to you.
For more information please see: Guide to Executive Income Protection
What are the tax implications?
Although you would need to consult your accountant and local tax inspector, it is usually the case that the premiums for an executive policy can be put through as a business expense. However, any benefit paid to you (via the company) would need to go through PAYE, thus incurring income tax and national insurance (both for yourself and the business).
Essentially, the premiums with a personal plan would be paid from after tax income and the benefit would be free from tax, whereas with an executive plan the business may be able to expense the premiums but the benefit would incur income tax and NI.
For this reason insurers will usually allow up to 80% of gross earnings to be covered with an executive plan but only 50-60% with a personal plan. Naturally, the premiums will be far higher with an executive plan as a higher amount will need to be insured to cover the tax.
Which is better?
If you are an employee and your employer is willing to offer income protection as an employee benefit then an executive policy can make a lot of sense.
However, if you are a shareholding director (possibly the only shareholder) then it is worth speaking with your accountant as to which option is the most tax efficient.
Get in contact
If you have any other questions about Executive Income Protection feel free to give one of our experts a call on 01273 646 484.
Frequently Asked Income Protection Insurance Questions
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