Executive Income Protection Safeguarding Your Business and Key Personnel

Understanding Executive Income Protection for UK Businesses

Running a small business can be challenging at the best of times. But, when a company director or senior executive is ill or injured, things can get particularly tough.

This article looks at how Executive Income Protection Insurance can help mitigate this risk and provide some financial certainty.

The Financial Impact of an Absent Executive

The temporary loss of a key employee can have serious consequences for any business. This is especially the case in small and medium businesses where CEOs and company directors often have a hands-on role.

If the fulfilment of contracts and the generation of revenue rests on their shoulders alone, the risks are high. Their absence can disrupt operations, strain resources, and even endanger client relationships. In the worst case scenario, their absence could lead to insolvency for both the business and the executive.

Statistically the risks of long-term illness are very real. Recent data shows that 7% of the working-age population in the UK are economically inactive due to long-term sickness (House of Commons Library, 2024).

An Executive Income Protection policy is one way businesses can offset these risks. And, at the same time, provide valuable sick pay benefits to select employees.

What is Executive Income Protection and how does it work?

Executive Income Protection is a type of insurance policy for small and medium-sized enterprises (SMEs) in the UK. It helps businesses manage the financial impact of losing a fundamental employee to illness or injury.

The business is the policyholder and each policy covers one employee on payroll (the life insured). Often these are executives such as a director or business owner. If they are then ill or injured and unable to work, the policy pays the company a monthly benefit.

The business then uses the monthly benefit to fund the employee’s sick pay through PAYE. As a result, the employee’s monthly income remains stable, reducing the financial burden on the company. This provides essential personnel with financial security, allowing them to focus on their recovery while the business takes care of its clients.

By covering the executive’s sick pay, the policy helps free up revenues to maintain continuity. If necessary, the business can hire temporary staff or contractors to cover the executive’s duties. This helps ensure that the company fulfils its contracts, keeps clients happy, and continues to operate effectively.

Covering Dividends with Executive Income Protection

Executive Income Protection can cover up to 80% of the employee’s total taxable income. Importantly, this can include basic salary, P11D benefits and also dividend income (subject to individual policy conditions).

During the application process, insurers will request proof of dividend payments over a period of time. Typically this will come from accounts, corporate tax returns, personal tax returns and bank statements. Ideally, these documents will show that the company has paid dividends at regular intervals as opposed to on an ad-hoc basis.

Since dividend income can fluctuate, insurers may take an average of payments over a period of 1 – 3 years. This figure may then be reviewed during the term of the policy.

In the event of a claim, insurers may request this information is updated. If business profits or dividends have been lower prior to any claim, the insurer may adjust the monthly income to reflect this.

Pension & National Insurance Contributions

Businesses can often extend cover to include employer pension scheme contributions and National Insurance payments. Insurers may have maximum limits on the amount of cover available for employer pension contributions. This may be either a percentage of salary or a fixed amount.

How is Executive Income Protection Taxed?

A potential benefit of Executive Income Protection Insurance is that HMRC can treat premiums as a tax-deductible expense. However, for this to apply, policies must be “wholly and exclusively for business purposes” (see HMRC Business Income Manual here).

This is relatively straightforward for an employee who does not have a financial interest in the company. However, for shareholders the tax treatment becomes more complicated. Businesses must seek advice from their accountant regarding the tax treatment of premiums where the employee covered is a shareholder of the company.

For an employee with no financial interest in the company, provided any policy is set up correctly and monies received from any claim are used as intended, then the following tax treatments should apply:

Policy Premiums

• Premiums are an allowable business expense and are tax-deductible. This means businesses can claim corporation tax relief on premiums.
• Premiums are not a P11D benefit in kind. This means that there should be no income tax to pay on this as an employee benefit.

Monies Received from a Claim

• The monthly benefit payments received from a claim are treated as revenue.
• The business pays the employee as usual through PAYE who pays income tax on these earnings.

For business owners or salaried company directors, this can be more tax-efficient than paying for a personal income protection plan from post-tax earnings.

Disclaimer: The information on tax above is for guidance only and should not be considered advice. Tax treatments of employment benefits can change. Always consult with an accountant for the latest tax advice specific to the business.

How Much Does Executive Income Protection Cost?

Several factors influence the cost of any plan, with one of the biggest being the size of the income the company wants to insure. Obviously, all other things being equal, the greater the income the higher the premiums. However, the percentage of the income from dividend payments may also be a factor.

Most insurers consider basic salary a more stable form of income than dividends. Therefore, executives who receive a greater percentage of their income from dividends will tend to have higher premiums.

Other factors that will affect the cost of premiums can include:

• Employee Details: Age, smoking status, and pre-existing conditions of the insured employee.
• Job Risk: Occupations with higher risks are likely to lead to higher premiums or exclusions.
• Deferred Period: A longer deferred period (the time before benefits start) generally results in lower premiums.
• Benefit Period: Longer benefit periods will increase premiums. Policies which pay a benefit up until retirement age offer protection against career ending illnesses or injuries. Therefore these are likely to be more expensive than a policy with a benefit period of just 5 years.
• Policy Term: The duration of the policy.
• Premium Types: Options include reviewable, age-banded, or guaranteed premiums, each with different pricing structures.
• Level or Increasing Cover: “Level Cover” Provides a fixed amount of cover that does not change over time. “Increasing Cover” adjusts with inflation, typically linked to the Retail Price Index (RPI).

Short-Term and Budget

For businesses with limited budgets, short-term and budget policies are available. These policies offer a shorter benefit period, such as 12 or 24 months, which significantly lowers monthly premiums.

This may not be suitable for businesses who want to provide long-term sick pay as an employee benefit. However, this can be cost-effective for companies needing business protection against the immediate absenteeism of key personnel.

Group Income Protection

Businesses with more than one executive or director requiring income protection may want to consider a group policy. Some insurers will consider group applications where there are only 2 employees on the policy. If there are 5 or more employees then a wider selection of insurers can be considered. In this case, businesses should definitely look to obtain some comparative group income protection quotes.

However, companies should consider that group policies will not cover dividend income.

What Illnesses or Injuries are Covered?

A common misconception is that income protection policies only cover specific health conditions. This is not the case. Instead the emphasis is whether the employee is unable to work because of an illness or bodily injury, with a medical diagnosis required to confirm their condition. In the policy documentation this is normally referred to as the “incapacity level”.

Definitions of Incapacity

Personal income protection policies may provide different levels of incapacity which can effect the cost of premiums. However, for the purpose of an executive policy, it is important that the definition is specifically aligned with their occupation. This is known as Own Occupation Cover and is the most comprehensive level of incapacity.

To make a valid claim, the insured employee must be unable to perform essential tasks of their job because of illness or injury. This approach protects the business and its significant employees in a variety of scenarios.

For the purpose of an executive policy, “Suited Occupation” and “Any Occupation” incapacity definitions are not likely to provide suitable cover.

Exclusions: What’s Not Covered?

All policies of this nature will have certain exclusions make clear in the terms and conditions. Common exclusions include:

• Injuries from dangerous sports or illegal activities.
• Self-inflicted injuries.
• Illnesses or injuries which are a result of a pre-existing medical condition.
• Illnesses or injuries occurring while travelling to countries against Foreign Office advice.

Additional Benefits

Many plans include additional benefits, which can enhance the value of the policy:

• Online GP Services
• Back to Work Benefits
• Physiotherapy Sessions
• Complementary Therapies
• Second Opinions

These additional services can assist in the recovery process, helping employees return to work sooner.

Get an Executive Income Protection Quote

Obtaining suitable quotes for Executive Income Protection requires an understanding of the business’s needs and the different policies available.

Using the services of an insurance broker that specialises in business protection can simplify the process and ensure the selection of a suitable policy. In many ways it is preferable than dealing directly with multiple providers not least because providers are not able to advise customer’s on the suitability of different policies.

Benefits of using a specialist broker:

• Access to extensive market knowledge
• Tailored advice
• Ongoing support and policy management
• Assistance with the claims process

Medical History & Qualifying Criteria

Prior to obtaining quotes the executive to be insured will need to answer a series of health and medical questions. It is crucial that the information requested by the insurance provider is fully and accurately disclosed and that there are no omissions.

Quotes will also be dependent on the various qualifying criteria in relation to the business and the employee to be insured. Generally, these include:

• The policyholder must be a UK-resident business, such as a Limited Company or Limited Liability Partnership (LLP).
• The insured employee must also be a UK resident.
• Employees often need to have been registered with a UK GP for at least two years.
• Insurers typically cap maximum cover at £300,000 per annum.
• Additional documentation may be required for covering dividends, particularly if they are paid irregularly.

Contact Black Lion Insurance Today

As an FCA registered insurance broker, Black Lion provides specialist advice on protection insurances to small and medium sized UK businesses. Speak to an experienced consultant today to receive quotes from an extensive range of policies from some of the UK’s biggest providers.