If you are a director of your own company, a freelancer or an entrepreneur, an income protection policy is a must have! If you are your own boss, consider this a sick pay policy and secure it in the most tax-efficient way.
Executive Income Protection lets small businesses provide their directors and employees with a valuable benefit to secure their income, if they are unable to work for health reasons. Businesses can help protect not just a director’s salary but can also cover dividends and P11D benefits which form part of their overall remuneration.
The policy is owned by the company but is underwritten on the life of an employee or director. If for any reason they are not able to work due to illness or injury, the policy would pay out a monthly benefit to the business. The business must then distribute the monthly pay-out to the employee via the usual payment method (e.g. PAYE, dividends or a mix of both).
How It Works
For small businesses this is a simple process and, in most times, this is how it works:
- The business takes out the Executive Income Protection Policy
- Employee’s income (mix of dividend and salary) is now protected as long as the policy premiums are paid by the business
- If the employee is injured or unwell and unable to work, the business makes a claim, and the policy pays out the monthly benefit.
- Payments cease when the employee returns to work, the payment benefit period ends or the employee dies, whichever comes first.
How Much Cover is Available
Due to the tax efficiency and high percentage of income that can be covered, it is a great way for key members of a small business to protect their income against being unable to work.
The monthly benefit can be up to 80% of the employees’ gross income. These can include:
- Bonuses and overtime
- Company pension contributions
- Other P11D Benefits
HMRC usually allows premiums for Executive Income Protection to be treated as an allowable business expense, with corporation tax relief available and no additional income tax or National Insurance to pay.
The director or employee does not have any P11D Benefit-in-kind tax to pay either.
The Waiting Period
This is how long you need to wait before the claim pay-out begins. The waiting period is also called the ‘deferred period’ or ‘excess period’. Waiting periods can range from 4 weeks, 13 weeks, 26 Weeks or 52 weeks.
If you choose a longer waiting period, the premiums will be cheaper than a shorter period and vice versa. If you run your own business, then a shorter waiting period may be suitable as you can have access to the benefits quicker.
Do you need an income protection plan?
You might have savings to fall back on or an adequate sick pay package provided by your employer which may cover your expenses for a short period. However, Income Protection will help you to maintain your lifestyle and pay the bills in the short and the long term, without eating into your savings.
Bear in mind that, unlike permanent employees, a business owner does not have access to an adequate sick pay package. You may have business reserves to fall back on which may cover your expenses for a short period, however an executive income protection policy will cover up to 80% of your income from the business, till you are fit to go back to work (depending on the benefit period of the policy)
How long does your benefit last?
Usually, your benefit payment stops as soon as one of the following happens:
- You return to work
- You reach the maximum benefit period, depending on the policy.
- You pass away
Why do you need to take our expert advice?
Without a regular income, you and your family could be struggling to pay monthly bills and provide for the day-to-day essentials; so, this is one insurance cover you most definitely need to have.
We will help you prioritise and customise your cover depending on your budget and requirements.
Stop worrying about being unable to earn. We’ve got you covered!
You may be also interested in reading our guide to ‘Relevant Life Insurance’