How executive income protection works
Your company chooses a person to insure and a level of monthly benefit linked to their earnings. If that person cannot do their job because of illness or injury, and the waiting period has passed, the insurer pays the company each month while the claim lasts.
The company then pays the person through payroll in the usual way, with income tax and National Insurance deducted. For the employee, their salary keeps arriving. For the company, it avoids carrying the cost of an absent director on top of paying someone to cover their work.
Why directors often lack sick pay
Many owner directors pay themselves a small salary and take the rest as dividends. If they fall ill, dividends depend on profits, and profits often fall when the person running the business is off. Statutory sick pay is set at a modest weekly amount that would not go far for most households.
Executive income protection lets the company plan for this. Because the benefit is based on the person's total remuneration (which can include dividends, depending on the insurer), it can replace far more than statutory sick pay would. The company keeps control of the money and decides how to pay it, within the rules of the policy.
Choosing the waiting period and benefit term
The waiting period, also called the deferred period, is how long the person must be off work before the policy pays. Shorter waiting periods cost more. Many companies line it up with the end of any company sick pay so the two run one after the other.
You also decide how long benefit can be paid for each claim. Some policies pay until the person returns to work or reaches the end of the policy term. Others pay for a set number of years per claim, which costs less. A shorter benefit term can still make sense for a business that mainly wants to bridge a recovery period.
- Match the waiting period to your company sick pay
- Decide whether to include employer pension contributions
- Choose between benefit to policy end or a limited term
- Set the end age to suit the person's planned retirement
What counts as being unable to work
Each policy has a definition of incapacity, and it shapes when a claim is paid. The strongest definition is own occupation, where the insurer asks whether the person can do their own job. Other definitions look at whether they can do a similar job, or carry out a set of everyday tasks, which can make a claim harder.
Many executive policies also support a phased return. If the person comes back part time or in a lighter role while they recover, the policy can often pay a reduced benefit to make up some of the gap. Many insurers add rehabilitation help, such as physiotherapy or mental health support, to help people back to work sooner. These details vary between insurers, which is one reason to compare them carefully.
The usual tax treatment
Premiums for executive income protection are normally treated as an allowable business expense for corporation tax, and the cover is not normally a P11D benefit for the person insured. When a claim is paid, the benefit counts as income for the company. Because the company then pays it out as salary, which is itself an expense, the two usually balance out.
The person pays income tax and National Insurance on the salary they receive, just as they would at work. If the policy also covers employer pension contributions, the company can keep those going during the claim. Tax treatment depends on circumstances, so ask your accountant to confirm how it applies to your company before you set the policy up.
How Hi Tomorrow helps companies set up executive income protection
We start by looking at how the director or employee is paid, what company sick pay exists and what other cover they hold personally. That shapes the benefit level, the waiting period and the term we suggest.
We then compare the insurers on our panel. Their definitions of incapacity and their rules on how earnings are counted differ, so the comparison matters as much as the cost. We help with the application and the medical questions, and if the person ever needs to claim, we help the company with the paperwork.