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director income protection

Specialist Income Protection for Company Directors

If you work through your own limited company, possibly as a contractor or freelancer, you have two choices when it comes to taking out income protection insurance – Personal Income Protection and Executive Income Protection.

In this guide you will find out the following:

  • Key differences between personal and executive income insurance.
  • How your business can own and pay for your policy in a tax efficient manner.
  • Key points to consider when taking out executive protection.
  • Other popular policies including Relevant Life Insurance and Health Insurance.

Please feel free to call us on 0208 432 7333 if you have any questions and would like to speak with a regulated Financial Adviser (there is no fee for our insurance broking service as we are remunerated via the insurers).

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Difference between Personal and Executive plans

Personal and executive policies are the same in that they payout a monthly benefit if you cannot work due to illness or injury but differ with regards to who owns and pays for the policy.

With personal income protection you own and pay for the policy, whereas with executive income protection your company owns and pays for the policy.

If you need to make a claim, with a personal policy the insurer will pay you directly and the benefit received will be free from income tax. With an executive plan the funds will be paid to your company, which can then be distributed to yourself. As the benefit paid will be treated as a trading receipt it will normally be taxable.

To cover the potential tax that would need to be paid on an executive policy payout, you are usually able to cover up to 80% of your salary and dividends, rather than around 60% with personal cover.

Key Questions

 
Personal Plan
 
Executive Plan

Who owns the policy?

You

Your Business

Who pays the premiums?

You

Your Business

Who is the benefit paid to?

You

Your Business

Is tax payable on the benefit?

You

Your Business

How much can I cover?

Up to 65% of Salary and Dividends

Up to 80% of Salary and Dividends

With executive income protection you are also able to cover employer National Insurance Contributions (if applicable) and pension contributions (which can have sizeable pension tax benefits for directors).

 

Which policy is best for Directors?

Many Company Directors like Executive plans because their business can pay the premiums rather than having to pay for the policy personally from after tax income.

Although we haven’t had any clients report issues (time of writing: November 2015), it is important to check with your accountant that they are happy for the premiums paid by your company to be put through as a tax deductible business expense. The current precedent tends to follow the employee benefits market, where group income protection premiums are a cost of business and any payout from the policy is taxed.

How much does it cost?

The pricing structure for personal and executive policies are broadly the same – it depends on:

  • How much you want to cover;
  • How long you can wait before the policy starts paying you (called the deferred period);
  • The term length of the policy;
  • How long the policy can payout for (until the end of the policy term, 5 years, 2 years or 1 year);
  • Your age when you take out cover;
  • The type of work you undertake;

As well as business travel requirements and whether there are any medical considerations or hazardous hobbies to account for, such as private aviation.

Although personal income protection quotes are readily available online, executive plans are more specialised and online quotes are not available. Please call us on 0208 432 7333 to speak with an adviser who will be able to provide you with quotations from the leading executive income protection providers.

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Your Drewberry adviser will have a 15 to 20 minute call with you to take down these pricing factors before emailing over the most suitable recommendations to you given your specific circumstances.

We are independent so we can research the whole market to make sure you obtain the most appropriate policy for your circumstances.

Robert Harvey
Independent Protection Expert

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Important point about the Deferred Period

If you run your own business you naturally do not have a sick pay entitlement in the usual sense, but rather you may have some of the following that could help keep you afloat for a little while should you suffer a minor illness or injury:

  • Existing capital reserves in the business
  • Outstanding client invoices that are still to be paid
  • Personal savings outside of the business

If you are able to utilise any of these sources of funds to cover short-term incapacity, it makes sense to stretch out your deferred period from 4 weeks to 13 weeks, or longer. Moving from a 4 week deferred period to 13 weeks can lower your premium by around 40-50%.

 

Is your husband/wife also a Director?

For tax reasons, it is common for contractors or freelancers to include their wife/husband as a director of the business if they don’t already work and receive an income from another source.

If this is the case and your partner has no revenue generating role within the business (i.e. there is no business without you), then it is often possible to insure a percentage of their dividends on your policy. This enables the policy to more fully reflect the potential loss to household income if you were out of action. Please contact us for more information on how to set this up.

 

You may also be interested in…

Relevant Life Insurance

Another popular policy with Company Directors is Relevant Life Insurance. This very similar to normal life insurance in that it is taken out to provide for your loved ones if you passed away, but it is owned by your company and the premiums usually qualify as a tax deductible business expanse, so there can be significant tax savings to be made by taking out life cover this way.

Pension Advice

Also, many eventual Company Directors first tend to build up experience working for a number of leading firms before going it alone. If this is the case then there can be significant benefits to consolidating previous company pensions into a ‘new style’ arrangement (with new contributions being paid by your business, which is usually an allowable business expense). Our specialist pension advisers would be happy to talk you through these benefits, but the ultimate goal is ensuring that you’re maximising your potential retirement.

 

Key points from this article

  • With executive income protection your company can own and pay for your policy
  • If possible, there are significant savings to be made by extending your deferred period
  • You can also cover your partners dividends if they are not revenue generating
  • Relevant Life Insurance is a tax-efficient means of gaining cover for Directors
  • You could also benefit by paying for pension contributions through your business
 

Advice matters

Taking advice from a protection specialist makes sense, not least because this is a complex area and you may well have limited time to research the market. What is more, some policies, especially more specialist plans, are only available from insurers that distribute through professional advisers.

We are able to talk you through the options in detail, including explaining the ins and outs of cover along with providing you with quotes and guidance on the most suitable insurers. We understand your needs as a Company Director, so if you are thinking about income protection, then speak to us to find out more.

Please do not hesitate to pop us a call on 0208432733 or email us at help@drewberry.co.uk.

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Neil
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Jake was extremely helpful. He spent a lot of time in getting an exact understanding of my income protection needs. He kept in touch regularly as I sorted out some health issues along the way to getting the insurance I needed. His professionalism and care was exceptional. I would readily recommend Jake to anyone looking for income protection.
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