The latest L&G State of the Nation Report suggests that many Business Owners may not have heard of Executive Income Protection. Given the value it can offer to Small Businesses and Limited Company Owners, here’s a simple introduction to Executive Income Protection
What is Executive Income Protection?
Executive Income Protection is a specialised form of income protection.
It’s taken out by small businesses for the benefit of key employees (including salaried Directors) to replace their income in the event of sickness or incapacity.
In short, it acts like long term sick pay.
Key Benefits
- Income Replacement
Loss of income poses a huge financial threat to everybody. However the risks for Business Owners can be much higher and is so, the need to protect income is greater.
- Tax Efficiency
Premiums are paid for by the business. They are usually treated as an allowable cost and completely tax deductible. They are also usually not treated as a P11D Benefit it Kind to the employee.
- Savings
As premiums are paid for gross by the business, there can be a tax adjusted saving when compared to paying for cover from personal net income.
- Dividend Cover
Cover can include Director’s salary and dividends to ensure that the Business Owner’s income is properly protected.
- Spousal Dividends
In the case of Business Owners being spouses, one can cover for the full dividend amount if they are more responsible for generating the revenue.
- Pension Payments
Employer pension contributions could also be covered to protected long term retirement plans.
- Employer’s NI
Policies can include cover for Employer’s National Insurance Contributions
- Individual Coverage
Cover amounts can be tailored to each individual.
- Flexible Policy Terms
Cover terms can be tailored to each individual.
- Value Added Benefits
Some policies have value added benefits. These include access to virtual Doctors that significantly reduce wait times when needing to speak to a GP.
How Does Executive Income Protection Work?
The Business takes out a policy which is for the benefit of the employee.
The cover amount is usually based on the employee’s allowable income (this can include salary and dividends for Limited Company Owners).
The maximum amount available is usually up to 80% of the allowable income.
In the event of a claim, a payment is made gross to the business. As the amount received is paid on to the employee, there is usually no Corporation Tax to pay.
The employee will be taxed at the appropriate rate.
The payment will usually continue until the employee is well enough to return to work or the end of the policy. There are also short terms policies which usually pay out for 1-2 years.
Who can Benefit?
- Business Owners – Being off sick can pose a greater risk for Business Owners
- Small Businesses – Businesses who aren’t large enough to have a group scheme
- Key Employees – Tailored for each individual and a great way to retain key staff.
Businesses may also consider Relevant Life Cover for key employees.
Getting Started
Executive Income Protection might not be suitable for everyone.
It’s important to get specialist advice to make sure that this is the right approach.
Whereas most insurers offer income protection, not many offer Executive Income Protection. It’s important to understand each provider’s offering so that you get the policy that is right for you.
