Executive income protection – what is it and who needs it?

12 min Read Published: 30 Mar 2022

Executive income protection - what is it and who needs it?Protecting your income in case you become ill or suffer an injury is arguably the most important way to secure your business. People are usually the lifeblood of any business and contractors and directors can be particularly vulnerable if their business relies heavily on their capacity to work. Executive income protection is a tax-efficient solution that safeguards businesses against unpredictable events affecting the key people who generate revenue.

In this article, we will explain how executive income protection insurance works, what it covers and who should consider buying it.

How does executive income protection work?

Executive income protection insurance protects your income in case you become unable to work due to illness or injury. The insurance can cover up to 80% of your gross earnings and you can start to receive the benefit as quickly as a week after your first day of incapacity to work.

Key benefits of executive income protection insurance

The main benefit of executive income protection is that the insured person continues to receive an income to pay bills such as mortgage payments, rent and utilities as well as other household outgoings.

Incapacity could have a substantial effect on the revenue that the business generates, especially where the insured person is a director, contractor or key individual within a business. Executive income protection stretches to cover earned income as well as dividend income and can even include dividends that are being paid to a spouse.

One of the other key benefits of executive income protection is that multiple claims can be made and claims do not affect the ongoing cover or the price of the insurance. While conditions such as cancer, depression, stress and back pain can recur, executive income protection will continue to provide cover in periods when these or any other conditions mean you can't work, as long as you bought your insurance before you suffered such conditions.

Who can buy executive income protection insurance?

Executive income protection insurance is purchased by the business to protect an employee, be that a director or other employee. Businesses that qualify for executive income protection usually need to be a limited company or a limited liability partnership that is registered in the UK. The policy is paid for and held by the business but it protects the insured employee who will answer the health and lifestyle questions that form part of the application process.

The types of income covered by executive income protection insurance

The level of cover (the amount of money the insurance will pay if there is a claim) that you can insure with executive income protection is based on what the insured person takes from the business and can include cover for:

  • Gross earnings
  • Dividend income (partner's dividends can be included)
  • Employer national insurance contributions
  • Employer pension contributions

How do claims for executive income protection work?

If the insured person is signed off work by their doctor, a claim can be submitted to the insurance provider. Depending on the deferred period chosen, the business will start receiving a monthly benefit. A deferred period is the period of time that you've chosen to wait, after the first day off work until the policy starts paying the benefit and can be 1, 4, 13, 26, 28 or 52 weeks.

An executive income protection insurance claim can continue to pay for as long as it takes for the employee to return to work, only stopping once they reach retirement age or pass away. However, there are some short-term options that are subject to limited claim periods - a maximum of 1, 2 or 5 years for each claim that is made - these options can be cheaper than an unlimited cover. Qualifying state sick pay benefits including statutory sick pay and employment support allowance can still be claimed when in receipt of an income protection benefit.

How is executive income protection insurance taxed?

Executive income protection insurance premiums are paid by the business and can be submitted as a business expense, reducing net profits, which in turn can reduce corporation tax. If there is a claim, the insurance company will pay the monthly benefit to the business and will be taxed as income before it is paid to the insured person. Unlike some other employee benefits, executive income protection insurance isn't treated as a P11D benefit so there is no extra tax for the insured person to pay.

What does executive income protection cover?

Executive income protection insurance covers lost income if a doctor or medical professional deems the insured person unable to do their normal work duties due to any physical or mental incapacity. This means that the insurance is not limited by specific conditions or diagnoses, providing very comprehensive cover.

Common income protection claims include the following conditions:

  • Musculoskeletal
  • Mental health
  • Cancer
  • Fractures
  • Covid

Incapacity definitions

Income protection insurance claims are assessed using ‘incapacity definitions’ - this definition is decided when the insurance policy is issued and is dependent on the type of work the insured person does and the insurance company’s guidelines.

Employees in clerical jobs who do no manual work will normally be covered in instances where they are unable to do their own job. However, some occupations that require specialist skills or a high degree of manual work may be restricted to payout only if the employee cannot do any job or are unable to complete a number of specific daily tasks. Where the insurance is to cover someone who does manual or specialist work, do speak with a specialist business insurance broker* as they will source the best definition of insurance to maximise instances when a successful claim can be made.

Incapacity definitions have a large bearing on the value of an income protection policy so it is worth ensuring that you understand when a claim is payable. You can learn more about incapacity definitions and how these work in our article, "Sick pay insurance: Occupation incapacity definitions explained"

What isn't covered by executive income protection?

As with most insurance policies, you can expect some standard exclusions for executive income protection. Normally you cannot claim against executive income protection if your incapacity:

  • Is caused by anything self-inflicted
  • Is caused by drug or alcohol abuse
  • Occurs during travel to an area of conflict, terrorism, epidemics or that the Foreign Office advises against travel to

Besides the above reasons, a claim can be declined for income protection if the insured person has failed to disclose information accurately during the application process. It is vital that you disclose all information that you are asked, fully and honestly when you apply to prevent such a situation.

Individual income protection vs Executive income protection

Individual income protection differs from executive income protection in some ways. Here is how they compare:

Executive income protection  Individual income protection
Covers up to 80% of gross income including dividends Covers up to 65% of gross income
Paid for by the company Paid for by the employee
Benefit taxed as income by the company before it is paid to the employee Paid tax-free directly to the employee
Insurance payment is paid by the company and as such qualifies as a business expense thus reducing corporation tax Insurance payment is paid by the individual

Who should consider buying executive income protection?

Executive income protection is usually bought by directors or contractors of a company. Those who purchase executive income protection can pay for the insurance through the company as well as benefit from claiming the monthly premiums as a business expense. A company can also choose to extend executive income protection to a key person within their business.

How to compare executive income protection

Selecting and buying the right executive income protection insurance is best done through a specialist business protection broker* who can assess your business needs and recommend the right type of insurance policy for you, at the best price. Independent specialist business insurance brokers are well versed in how to maximise tax efficiencies and have access to the whole insurance market so you can be sure you’re getting value for what you pay.

Applying for executive income protection

The application process for executive income protection insurance usually involves assessing the insured person’s health and lifestyle, both of which can have a bearing on the cost of the insurance and the terms that you’re offered. Your broker can help you to navigate this to avoid price increases and ensure that the terms and conditions match your expectations.

At Money to the Masses we searched the market for our very own business insurances so we have tried and tested the services of a specialist business insurance broker which exceeded our expectations. You can arrange a call with this business insurance broker* and discuss your own needs without any obligation to proceed. The brokers are well trained and knowledgeable in this specialist area of insurance and can often access policies that aren’t readily available online.

 

If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. This link can be used if you do not wish to help Money to the Masses and do not wish to qualify for the cashback referred to in the article