While there are several benefits to executive income protection insurance, many businesses are forced to balance the cost against the potential financial advantages. The keyword here is “potential”, which can sow the seeds of doubt about the full benefits. It is, therefore, no surprise to learn that many businesses are not covered by what can be a critical financial service. As ever, with any insurance cover, we only tend to recognise the real value when it is needed!
We will now look at the benefits of executive income protection, how it works and the tax treatment.
How does executive income protection work?
While executive income protection is commonly associated with company directors/owners, it is generally used to cover those holding “key” roles. The issue can become more acute with smaller companies where the influence of individuals is often magnified. In reality, executive income protection is just as crucial for business cash flow as it is for the individual.
For example, a standard executive income protection plan would take into account the individual’s:-
- Gross earnings
- Dividend income (potentially including partner’s dividend income)
- Employer national insurance contributions
- Employer pension contributions
Typical income protection insurance covers around 60% of an individual’s gross income, but executive income protection insurance can be as high as 80%.
Advantages of executive income protection
While there are obvious advantages of executive income protection insurance, it is vital to recognise the value of the complete package. Some of the main benefits include:-
- Premiums are paid by the company; therefore, there is no cost to the individual
- Premiums can be offset as a tax-deductible expense
- Up to 80% of gross income can be covered
- Protects company cash flow while the individual is unable to work
- Multiple claims do not impact the terms and conditions of cover
- Peace of mind for the company and the individual
Obviously, the loss of key personnel can significantly impact business performance and profitability. While the full loss may not be covered by executive income protection insurance, it will undoubtedly help the company’s finances in challenging times. Many policies will allow multiple claims for the same individual without impacting premiums. This is more relevant for cover taken out before recurring illnesses/medical conditions.
Tax treatment of executive income protection
When considering any business insurance, it is also essential to recognise the potential tax implications. In this instance, the company pays the premiums, which can be offset as a taxable expense against income. Due to the circumstances in which executive income protection is used, it isn’t classified as a benefit-in-kind; therefore, there should be no tax implications for the individual.
As a company, when you trigger an executive income protection plan, the payments are paid to the company and then to the individual through the PAYE system. Incoming funds are treated as trading income for corporation tax purposes while recognised as trading expenses when payments are made to the individual. Consequently, the result is a neutral tax position.
Treatment of pre-existing conditions
As expected, some pre-existing conditions will be excluded from an executive income protection policy. This depends on the severity and the type of condition or whether it has been in remission and a recovery is currently underway. Where an individual is forced to take time away from the office due to a recurring injury/medical condition, as long as this was not a pre-existing condition, there should be no problems.
There are some scenarios which are not covered by executive income protection insurance, which include:-
- Illness/injuries brought on as a result of drug use, alcohol or substance abuse
- Self-inflicted injuries
- Injuries received when undertaking a criminal act
- Injuries/illnesses received in countries where the foreign office did not recommend travel
Much of this is common sense, but it is helpful to research this further and ask questions before taking out a policy with an insurance broker/insurance company.
Customising cover
The insurance industry is very flexible regarding executive income protection insurance. There are ways and means of reducing premiums while maintaining healthy financial support:-
- Limit the maximum claim period rather than the all-encompassing policy, which will maintain payments until the individual returns to work or retires
- Introduce a delay until insurance payments begin, with initial employee income covered by company cash flow
- Reduce gross payment cover from the maximum 80%
- Excluding specific conditions could also see a reduction in premiums
- One-off annual payments usually lead to a discount compared to monthly instalments
You can customise any executive income protection policy in several ways; minimising company costs while maintaining the individual’s income stream.
Popularity of executive income protection
A recent business population report by the Department for Business, Energy and Industrial Strategy shines an interesting light on the small business sector. These are businesses with fewer than 49 employees, companies that often have tight budgets. Even those who could afford a group risk income protection scheme may be classed as too small by insurers.
There was a slight reduction in 2021 compared to the previous year, with 5.5 million businesses having fewer than 49 employees. However, compared to 4.6 million businesses just a decade ago, this is still a significant increase, especially when considering the challenges of the pandemic.
It is unclear how many companies have executive income protection in place. However, a recent survey by Legal and General suggested that 84% of small businesses were open to finding more information about executive income protection. However, no more than 7% of the UK working population is estimated to have any income protection cover. Is it safe to say this is a service that isn’t being utilised as it should be!
Summary
While executive income protection insurance is traditionally taken out on directors, this also considers other key personnel. Where the individual cannot work for a prolonged period, insurance payments will assist with business cash flow while ensuring that the individual also receives regular income. If the company was struggling to make regular income payments, this could force the director/key person to sell shares in the company or call in any director’s loans. This is the unseen consequence of not taking out any cover for directors or key personnel.
If you would like to discuss executive income protection, or other protection policies, please contact us, and we can review your options in detail.