Income protection vs life insurance for company directors
Executive income protection and life insurance protect against two different risks. Income protection provides a regular benefit if illness or injury prevents you from working, while life insurance pays a lump sum if you die during the policy term.
For limited company directors, both types of cover can potentially be arranged and funded through the company. Executive income protection protects your earnings during your lifetime, while a relevant life policy can provide financial support for your family if you die.
Income protection helps maintain your income if you cannot work. Life insurance provides money for your beneficiaries if you die. Many company directors use both because neither policy replaces the other.
Income protection vs life insurance at a glance
| Feature | Executive income protection | Life insurance |
|---|---|---|
| Main purpose | Replace income while you are unable to work | Provide financial support after your death |
| Type of payment | Regular monthly benefit | Usually a single lump sum |
| Claim trigger | Illness or injury prevents you from working | The insured person dies during the policy term |
| Typical director structure | Company-owned executive policy | Company-funded relevant life policy or personal cover |
| Who receives the claim? | The limited company | The chosen beneficiaries or trustees |
How executive income protection works
Executive income protection provides a regular benefit if a director or employee becomes unable to work because of illness or injury.
The limited company normally owns the policy, pays the premiums and receives any successful claim payments. The company can then use the money to continue paying the director while they are unable to carry out their role.
Cover may be based on the director’s PAYE salary and, depending on the insurer, dividends arising from their work. This can be particularly useful for directors who take a relatively small salary and receive the remainder of their income as dividends.
Payments begin after an agreed deferred period and may continue for a fixed period or, with long-term cover, until recovery or the end of the policy term.
Where the arrangement meets the relevant conditions, premiums may qualify as a business expense. Claim payments received by the company are generally treated as taxable business income. Our guide to executive income protection tax looks at the treatment of premiums, benefits and claim payments.
How life insurance works
Life insurance pays a lump sum if the insured person dies during the policy term. The money can help their family to:
- Repay a mortgage or other debts.
- Replace income previously brought into the household.
- Meet ongoing household costs.
- Pay for childcare or education.
- Maintain a financial reserve.
A director can buy personal life insurance and pay the premiums from their own taxed income. Alternatively, the company may be able to arrange a relevant life policy.
Relevant life insurance for company directors
A relevant life policy is an employer-funded life insurance policy designed to provide death-in-service cover for an employee or director.
The limited company pays the premiums, which may qualify as an allowable business expense where the relevant conditions are met. The premiums are not normally treated as a benefit-in-kind for the insured director.
The policy is usually written into a relevant life trust. This allows any successful claim to be paid to the trustees for the benefit of the director’s chosen beneficiaries, rather than being paid to the company.
This differs from executive income protection, where claim payments are normally made to the company so that it can continue remunerating the insured director.
Do directors need both types of cover?
Many directors have a need for both because the policies address separate events.
Life insurance cannot help if you remain alive but are unable to work for several years. Executive income protection does not normally provide the lump sum your family may need if you die.
For example, a relevant life policy could help your family repay the mortgage following your death. Executive income protection could help maintain your household income if you suffered a serious illness but eventually recovered.
Directors may also consider critical illness cover, which pays a lump sum following the diagnosis of a condition covered by the policy. This can sit alongside income protection, although it is not a substitute for ongoing replacement income. See our comparison of income protection and critical illness cover.
Which should you arrange first?
The answer depends on the financial consequences you are most concerned about.
Life insurance may be the immediate priority where you have dependants, a mortgage or substantial financial commitments that would remain after your death.
Income protection may be particularly important where your household depends on your earnings and you have limited savings or sick pay. Statutory Sick Pay is only available for up to 28 weeks and may replace only a small part of a director’s normal salary and dividends. :contentReference[oaicite:0]{index=0}
Our guide comparing income protection and sick pay explains the limits of relying on employer or statutory support.
Choosing the right combination
Executive income protection protects your ability to maintain an income while you are alive but unable to work. Life insurance protects the people who depend on you if you die.
For many limited company directors, a combination of executive income protection and relevant life insurance provides more complete protection than either policy on its own.
A regulated financial adviser can compare the available policy structures, benefit levels and tax treatment based on how you take income from your company.