Company Directors Income Protection
Setting up as a director of your own Limited Company is usually an exciting move with lots of positives. Missing out on the comfort and security of employee benefits, however, is one of the downsides. Unlike an employee, you are completely responsible for your own financial well-being. Income Protection Insurance is a great safety net for providing peace of mind that should you become too ill or injured to work, you will receive an income benefit which would allow you to continue to pay your essential monthly outgoings.
The main difference between a company director policy and a regular Income Protection policy is that as a director, your company (rather than you personally) can pay the premiums for the cover. In both cases the beneficiary would be you individually, but company director policies can be funded by the business. Any premiums paid by the company are likely to be treated as a legitimate business expense by your accountant. However, there may be implications to your personal tax if the policy is seen as a ‘benefit in kind’. The money would be given to the company and then paid out directly to you.
If you were to take out a regular Individual Income Protection policy, you would have to pay the premiums from your post-tax income, but any claim pay-outs would be tax-free. If you make a claim on your limited company policy, claim pay-outs would be subject to corporation tax and you (as an individual) would also be subject to tax and NICs when the company pays the benefit on to you.
With an Income Protection policy you can only protect a portion of your income, usually up to around 70% for a regular individual policy. With a Company Director Income Protection policy you can protect up to 80% of your income. ‘Your income’ can also be classed as including both the salary you pay yourself from the business and the dividend payments you receive as well. It varies between insurers how many previous years' earnings they would look at to determine your earnings and thus how much you could cover. If your income varies a lot from year to year and you would like to protect a large portion of it, this is worth considering when looking at quotes.
Something we hear a lot with protection insurance is a general concern that the policy won’t pay out when we need it most. The Association of British Insurers (ABI) and Group Risk Development (GRiD) reported that the protection industry as a whole paid 98.3% of all claims in 2019. Unlike some other protection products – like Critical Illness Insurance – Income Protection does not rely on a set list of illnesses which it covers. It will pay out the benefit for essentially any medical condition which leaves you unable to work. The only exceptions to this normally is if you have a pre-existing condition when you take out the policy and the insurer includes specific conditions around this. There are normally also some standard exclusions, as with any insurance policy, such as when illnesses or injuries sustained:
You can choose at the outset, exactly when the policy will kick in and begin paying out the income benefit. Usually you would set up the waiting time for the policy to coincide with the amount of time any sickness pay is available. As a director of your own company, this can be minimal, so you can set the waiting time to the minimum, usually around one week.
We would recommend you choose a policy that covers your own occupation, this means that if you are unable to continue your own specific job, your policy would pay out. If you don’t specifiy own occupation, your policy would only pay out if you were unable to do any job. There are of course instances where you may be too injured or ill to carry out your own specific job, but you may be able to do another job - something less physically demanding for example.
As a Director of your own company, we would normally recommend a comprehensive policy which covers you right up until your expected retirement age. This means that if you didn’t ever recover enough to return to work, you would receive a monthly income benefit, until you reached the age you were due to retire. It is possible for you to opt for a lower premium and set a shorter maximum cover term – for example one or two years.
It is difficult to give a definitive answer to this question, as there are a number of variables which affect premiums. It is always a good idea to get a tailored quote from one of our expert advisers, based on your individual requirements and circumstances.
Factors which affect the premiums are your own personal circumstances as well as the choices you make about the cover.
Your Circumstances which affect premiums:
Your choices which can affect premiums:
Some example premiums:
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