The Complete Guide To Executive Income Protection For Company Directors

The tax-efficient business insurance that protects directors from loss of income due to illness or injury.

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Graham Cox - Founder & Cemap Mortgage Advisor |
Graham Cox
CeMAP Mortgage & CPSP Specialist Finance Advisor

One of the most important forms of insurance cover company directors can own is an Income Protection policy.

After all, your mortgage, bills, lifestyle and every other insurance policy you pay for is dependent on maintaining your income.

However, unlike a regular income protection policy, Executive Income Protection has the additional benefit of being tax-efficient, as it's funded by your business out of gross profit, rather than personal post-tax income. Read on to find out more...

What is executive income protection?

Executive Income Protection, or EIP for short, is a small business insurance policy which protects a company director or employee's income if they are unable to work due to an accident, illness or injury.

For a business owner, the easiest way to think of it is as company director income protection insurance.

It's a tax-efficient way for a SME business to pay limited company directors ongoing sickness benefit, protecting them from loss of earnings if the director is unexpectedly forced to stop working due to ill-health.

It's possible to arrange to pay a monthly income at up to 80% of the employees combined PAYE salary, dividend payments and P11D employee benefits. Some insurers also provide the option to get cover for the employer pension contributions and National Insurance.

EIP covers a very broad range of health conditions, including:

  • Mental health issues such as anxiety, trauma or depression
  • Muscoloskeletal problems
  • Cancer
  • Heart attack
  • Stroke
  • Many other illnesses, injuries and disabilities

In fact, the majority of illnesses and injuries are covered by the insurer's policy terms.

The only stipulation is that your GP or medical professional must sign you off from work in your own occupation.

Who can take out executive income protection?

An Executive Income Protection policy is business insurance specifically designed for company directors who have insufficient employees to take out a Group Income Protection scheme.

It's own-occupation cover and popular with directors of owner-managed Limited companies who want to insure against the loss of their income caused by illness or injury.

The insurance covers the company director's PAYE salary, dividends and P11D benefits.

A small business can also take out EIP cover for any other key employee, such as Head of Operations.

EIP and other business structures

Limited Liability Partnership's (LLP) can provide EIP insurance for it's employees, but not it's members.

Similarly a partnership or sole trader business can get cover for it's employees but not the equity partners or owner. However, they can take out a personal income protection policy.

How does Executive Income Protection work?

Executive Income Protection works as sick pay insurance for company directors or other designated salaried employee, should illness, accident or injury prevent them from working in their business.

It's usually classed as own-occupation cover, so when you make a claim the insurer can't refuse to pay out by stating you could find alternative employment elsewhere.

The monthly payments cover up to 80% of a company directors income (including dividend income and benefits) and continues until the beneficiary returns to work, retires, passes away or the policy term ends.

The business pays the monthly benefit via PAYE, so the person insured must be on payroll for salary.

For an additional cost, the business can also get cover for:

  • their employer National Insurance and Pension contributions
  • The loss of dividends and salary of a company director's spouse or civil partner in the event of the employee's (director's) incapacity. To qualify, their role must be non revenue generating, such as an administrator or HR position.

The policyholder (the business) can choose how long the insured person needs to be off work due to illness or injury before the policy benefit is paid. This is known as the deferment or wait period.

A typical deferment period is two or three months, but you can set it as short as one week or as long as one year. The longer the deferment period, the cheaper the policy premium.

Here's how the policy works in practice:

  • The limited company purchases and owns the policy and pays the monthly premium
  • The insurance policy covers the named company director or employee, ie the life/person insured, and optionally employer NI and pension scheme contributions
  • To make a claim, the company director or employee must be incapacitated due to illness, accident or injury and unable to work in their business/role.
  • The insurer pays the monthly benefit to the employer once the chosen deferment period has finished.
  • The employer pays the benefit to the employee via PAYE, making the usual Income Tax, employee National Insurance (NI) and workplace pension deductions

What are the benefits of Executive Income Protection?

A major benefit of Executive Income Protection for company directors is that it's an allowable business expense. Making it an extremely tax efficient and cost-effective way of protecting your income or that of a key employee.

In addition, EIP can optionally insure the employer's National Insurance and Pension contributions, making it a very comprehensive form of business insurance.

What is the difference between income protection and executive income protection?

Compared to personal income protection insurance, EIP covers a higher percentage (80%) of an individuals gross income to allow for the fact income tax and national insurance is deducted at source via PAYE.

With income protection, the insurer pays the monthly benefit to the policyholder tax-free, but caps the maximum benefit at a lower percentage, typically 60-65% of income.

Another key difference is that a personal income protection insurance policy is owned and paid for by an individual, whereas EIP is business insurance, so your limited company pays the monthly premiums.

Is executive income protection tax deductible?

Yes, it's a legitimate business expense, paid out of gross profit, and tax-deductible, reducing your corporation tax bill.

How much does Executive Income Protection cost?

The cost of an policy can vary enormously. The monthly premium is influenced by a huge range of factors including but not restricted to:

  • Age of the insured person(s)
  • The occupation / work role of the company director.
  • Smoking and alcohol consumption
  • How much cover is required
  • Duration of the policy term
  • Any pre-existing conditions you declare or, if requested, show up on a GP medical report.
  • The deferred period
  • Whether a limited benefit payment period is requested
  • Whether the benefit amount is index-linked

Guaranteed vs Reviewable Premiums

Guaranteed premiums mean exactly that. The quoted monthly premium will never change unless you decide to amend the terms of the policy (the duration or benefit amount etc).

Reviewable premiums, on the other hand, are usually reviewed by the insurer every five years, so whilst the monthly premium can be cheaper at the beginning of the policy, they can work out more expensive overall.

What is a limited benefit payment period?

How long the monthly benefit amount is paid for is up to the business owner to decide.

With a standard EIP plan, if the person insured suffers a serious injury or medical condition that prevents them from returning to work at all, the monthly benefit will be paid every month for the remainder of the term if necessary.

Alternatively, you can choose a limited benefit period. Typically for two years but one or five years periods may be possible. This is sometimes referred to as short-term EIP. The shorter the benefit period, the lower the monthly premium.

What is an index-linked benefit amount?

The policyholder can choose for the benefit level to be index-linked to allow for inflation.

It's an important consideration, because without it, the purchasing power of the monthly benefit would diminish over time.

You choose your desired indexation level at the outset. Typical options include indexaction at 3%, 5% or at the Retail Price Index (RPI). The benefit level will then increase annually but bear in mind so will your premiums, usually by slightly more than the indexation level.

How many times can my business claim on Executive Income Protection?

A business can claim multiple times. Either for a new illness or injury or a reoccurence of the same one claimed for previously. For example, due to chronic sciatica or the return of cancer.

Is EIP a P11D benefit?

No, unlike company cars and private medical insurance, HMRC does not consider EIP to be a P11D benefit. So there is no additional tax for the company director to pay.

How do I get an EIP quote?

If you'd like a quote, please schedule a call with a protection adviser at a time to suit you.

We have access to both household name and niche insurers, offering the broadest range of policy coverage and premiums. Your adviser can also provide quotes on complementary policies such as private medical insurance.

You can also call on 0117 205 0655 Monday to Friday between 9am and 5pm.

Graham Cox - MLIBF CeMAP Mortgage Adviser & Director of Hub FS Ltd

About the author

Graham Cox is the founder of Self Employed Mortgage Hub, the trading name of Hub FS Limited.

Based just north of Bristol, SEMH is an independent, whole of market broker and a true specialist in self employed mortgages, helping business owners across the UK get great mortgage and protection deals.

Graham's market commentary and analyis is regularly quoted in the national press and media, including The Guardian, Telegraph, FT Adviser, and BBC Radio Bristol.