I recently highlighted individual income protection and the important role it can play in protecting financial plans. I thought it would be useful to also offer some information on the executive version, which has certainly assisted clients in the past.
In most businesses certain employees and/or senior management figures are often considered vital to the success of the business. They typically tend to be the highest paid amongst the workforce and subsequently demand the most generous benefits packages.
Executive income protection is available for such individuals as well as the directors themselves. The policy works in the same way as an individual income protection whereby a monthly income is paid out if the life assured is unable to work due to accident or illness.
The difference with an executive income protection policy is that it is set up on a 'Life of Another' basis whereby the company pays the premiums and insures the employee/director. As the premiums are not classed as a P11D benefit (benefit in kind), then the company can get tax relief on them.
Any claim on this version is paid to the company instead of the director and the payment is classed as a trading receipt of the company (and taxed appropriately). With this in mind the level of cover needs to be sufficiently high so as to leave what’s generally considered a suitable level of post-tax income for directorship-standing individuals from the outset.
The director can then pay this out to themselves as income. As this payment would be classed as a salary it will be taxable, therefore the director can cover a higher percentage of their income (around 80%) instead of the usual normal 65%. A very important feature is that dividends can also be classed as income so they can be protected.
A range of flexible cover and benefit payment options enable the directors to tailor cover to meet the needs of their business as well as their employees.
Options include:
As with all types of insurance it really depends whether the business wishes to pass the risk to an insurance company, as the benefit is not really felt until the event occurs but I have seen how such cover can certainly help the business and the individual at such times.
In most businesses certain employees and/or senior management figures are often considered vital to the success of the business. They typically tend to be the highest paid amongst the workforce and subsequently demand the most generous benefits packages.
Executive income protection is available for such individuals as well as the directors themselves. The policy works in the same way as an individual income protection whereby a monthly income is paid out if the life assured is unable to work due to accident or illness.
The difference with an executive income protection policy is that it is set up on a 'Life of Another' basis whereby the company pays the premiums and insures the employee/director. As the premiums are not classed as a P11D benefit (benefit in kind), then the company can get tax relief on them.
Any claim on this version is paid to the company instead of the director and the payment is classed as a trading receipt of the company (and taxed appropriately). With this in mind the level of cover needs to be sufficiently high so as to leave what’s generally considered a suitable level of post-tax income for directorship-standing individuals from the outset.
The director can then pay this out to themselves as income. As this payment would be classed as a salary it will be taxable, therefore the director can cover a higher percentage of their income (around 80%) instead of the usual normal 65%. A very important feature is that dividends can also be classed as income so they can be protected.
A range of flexible cover and benefit payment options enable the directors to tailor cover to meet the needs of their business as well as their employees.
Options include:
- choosing a level of cover up to 80% of the employee's gross earnings, including P11D benefits and any dividends paid where this is directly linked to their performance within the business;
- the option to cover employer National Insurance contributions and any pension/life assurance premiums paid in relation to the insured individual;
- benefits that can be paid on a level basis or protected against inflation;
- flexibility – the benefit is paid direct to the employer, so it can either be passed on to the employee through PAYE or retained to support the business.
As with all types of insurance it really depends whether the business wishes to pass the risk to an insurance company, as the benefit is not really felt until the event occurs but I have seen how such cover can certainly help the business and the individual at such times.
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