Executive Income Protection

What happens if the executive leaves the company?

Just to clarify, executive income protection is a bit of a misnomer. The person doesn’t need to have ‘executive’ in their title. The main element of eligibility is to be employed by an LLP or a limited company.

If you leave, the policy would end, because to qualify for cover, you have to be employed by that business. You might then look at income protection on a personal basis or take a new executive income protection plan with a different company.

How is the payout taxed?

It’s an allowable expense in most cases and not a benefit in kind. When the policy pays out, as long as the person who’s insured is an employee of the business, they receive a set amount of money. The lion’s share is paid to the employee, but it also covers income tax, employer’s national insurance and employer’s pension.

Deductions would be made to preserve state pension entitlement, national insurance and pension payments. The net position after that income tax is deducted goes to the individual.

It’s a benefit to the individual, in that they don’t need to worry about their income while off sick, but it’s also a benefit for the business. That person may have been with the company for a long time, and you would feel a duty to pay them whilst they’re sick.

But without this policy in place, how long could you do that before it becomes too much of a financial burden? Executive income protection aims to take away that dilemma by providing a policy that pays instead of the business needing to pay for long term sick pay. It funds the sick pay and the business just has to meet the premium. It’s much easier all round.

How much cover can I get?

There are percentage limits based on your recurring active income from the business. If you were a director and employee of multiple businesses, with income from all of them, you couldn’t cover all your income via one company. You would either set up multiple plans or one for a lower amount.

You can generally receive up to 80% of that income plus national insurance and pension contributions. Many insurers cap this at around £25,000 benefit per month. The biggest one we’ve ever done was £27,000 a month, plus pension and national insurance on top.

What are the key benefits of executive income protection for the executive?

The main benefits are that it qualifies for corporation tax relief. If you need to protect your income and you’ve got a business, it’s a useful way to set it up.

Also, the monetary amount of cover is usually higher, because it includes pensions and national insurance, and is at a higher percentage of your income. You also don’t have to fund it out of your personal bank account.

One limitation is that your cover could be cancelled if you were to leave the company, unlike personal income protection where you could keep the same plan when moving jobs. There is also an age limit of 59 at entry.

So there are some limitations, but there can be huge benefits. The people we predominantly arrange this for are the individuals running a business at the top level.

What is the definition of incapacity or disability?

Executive income protection is different from critical illness cover, which lists specific definitions of illness that you have to meet to get a payout.

With income protection, there’s no list. You could have something that’s quite rare – but if it’s stopping you working, it would kick in. There can be different definitions around this – whether it’s the ability to do your occupation or specified tasks.

If the condition meets the policy definition and the claim is accepted, the policy should pay out, subject to the policy terms, deferred period and full disclosure of all relevant medical information. It has to be severe enough that you can’t work, which in most cases requires a doctor’s certificate confirming what you’re signed off with.

It could be a mental health condition, the result of an accident, or you’ve had cancer and face a long pathway of chemotherapy and radiotherapy. There are obviously policy definitions that differ between the insurers, which are quite technical. We would explain these as part of arranging your cover.

You’ve demonstrated this throughout the episode, but how can a business protection advisor help?

If you own a business and you want this kind of policy, you might just go direct to one of the big providers you’ve heard of. But a provider can only offer you their specific policy.

A broker will explore all the available options. We don’t just look at cost – we also consider the quality of the contract and the potential underwriting outcome. If a client comes to us with a more complex medical history, different insurers may assess that risk differently, so part of our role is helping find the most suitable solution for their circumstances.

A broker offers real benefits while setting up the policy and also, at the point of claim, you’ll have a friendly face acting for you, as opposed to negotiating with the insurer yourself.

I’ve heard about a situation where a broker put a policy in place and the claim was declined because of something that wasn’t disclosed, but it was completely irrelevant. The broker argued for four months, after which the insurer saw the light and overruled their decision and paid out to that individual.

Had that not been via a broker, I’m certain the client would have given up and not received a payout.

There are instances of non-disclosure where it is definitely the client’s fault – they deny that they smoke, for example, or understate how much they drink. But where it’s something immaterial to the policy, an insurer and broker should work together to get a good resolution for the client – and that’s just one area where we really add value.

Key Takeaways:

• Executive Income Protection (EIP) is a policy structured through a limited company or LLP that replaces an employee’s active income, such as salary, dividends, or bonus, if they are unable to work due to illness or injury.
• The structure of EIP is beneficial because it generally qualifies as an allowable expense for the business, offsetting corporation tax, and is typically not a benefit in kind for the individual.
• The coverage available through EIP is usually higher than personal policies, potentially covering up to 80% of earned income, and also includes payments for employer’s National Insurance and pension contributions, allowing the pension to continue growing while the employee is off sick.
• EIP payouts are based on incapacity – anything that stops the employee from doing their job and is confirmed by a doctor’s certificate – and is not limited to a defined list of illnesses like critical illness cover.
• Using a broker to arrange EIP is advisable as they explore all available options, considering contract quality and underwriting outcomes, and can act on the client’s behalf at the point of claim to resolve potential disputes with the insurer.
  
  

Business protection policies are subject to underwriting, policy definitions, exclusions and insurer terms and conditions. Tax treatment depends on individual circumstances and may change in future. Business Protected does not provide legal or tax advice. For specialist tax advice, please refer to an accountant or tax specialist.