How much executive income protection do you need as a company director?
The right level of executive income protection depends on how much of your income you would need to replace if illness or injury prevented you from working.
For most limited company directors, the starting point is your regular monthly expenditure rather than your salary alone. Mortgage or rent, household bills, food, childcare, loan repayments and other essential commitments all continue even if you’re unable to work.
Executive income protection can often insure a significant proportion of your remuneration, including salary and, depending on the insurer, dividends arising from your work. The exact benefit available varies between providers.
Start with your monthly expenditure
Before deciding how much cover to arrange, calculate the amount your household would need each month if your income stopped.
Typical costs include:
- Mortgage or rent.
- Household bills.
- Food and everyday living expenses.
- Loan and credit card repayments.
- School fees or childcare.
- Pension contributions and regular savings.
If your company would continue paying some salary or has cash reserves that could support you for a period, you may not need to insure the maximum amount available.
How much will an insurer cover?
Executive income protection is normally based on your earnings from the business.
Depending on the insurer, the calculation may take account of:
- PAYE salary.
- Work-related dividends.
- Employer pension contributions.
- Employer National Insurance contributions.
The calculation varies across insurers, particularly when directors receive a relatively small salary and most of their remuneration comes from dividends.
For more information on how different forms of director remuneration can affect cover, read our guide to salary vs dividends for income protection.
A regulated adviser can explain how individual insurers assess director remuneration and the maximum benefit available.
Choosing a deferred period
The deferred period is the time between becoming unable to work and the point at which benefit payments start.
Common options include 4, 8, 13, 26 and 52 weeks.
A longer deferred period will usually reduce the premium, but you’ll need sufficient savings, other income or company funds to bridge the gap.
Many directors choose a deferred period that reflects how long they could comfortably manage before insurance payments become necessary.
For more information on choosing the waiting period, read our guide to income protection deferred periods for company directors.
How long should benefits be paid?
Executive income protection can be arranged with either a limited or long-term benefit period.
Shorter benefit periods may pay for a fixed number of years for each eligible claim, while long-term cover can potentially continue until you recover, reach the policy’s chosen expiry age or the policy otherwise ends.
Long-term cover will generally cost more, but provides considerably more protection against an illness or injury that prevents you from returning to work for many years.
For more information on benefit periods, read our guide to how long income protection can pay you for.
Should you add inflation protection?
Many insurers let you choose cover that increases each year with inflation.
This is worth considering if you want long-term cover, as the same monthly benefit will buy less if you need to claim many years after taking out the policy.
Adding indexation will usually increase the cost of cover.
For more information on the factors that determine premiums, read our guide to the cost of executive income protection.
Consider your existing financial protection
You may not need the maximum available benefit if you already have other financial resources.
For example, consider:
- Your emergency savings.
- Your partner’s income.
- Company cash reserves.
- Any sick pay available to you.
- Other insurance policies.
The aim is to work out the financial shortfall you would face if you could no longer work, rather than automatically buying the highest level of cover available.
What about tax?
Where executive income protection is arranged by a limited company, premiums may be deductible for corporation tax purposes if they satisfy the usual rules for business expenses.
If a valid claim is made, benefits are normally paid to the company. The company can then use the money to continue paying the insured employee or director, with the relevant tax treatment applying.
For more information on premiums, claim payments and benefit-in-kind treatment, read our guide to executive income protection tax.
Finding the right level of cover
For most company directors, the objective isn’t to insure the highest amount possible. It’s to make sure that the household can continue meeting its important financial commitments if illness or injury prevents you from working.
The amount of cover, deferred period and benefit period all affect both the protection provided and the premium you pay.
A regulated financial adviser can compare insurers and recommend an appropriate benefit level based on your remuneration, company finances, existing resources and the type of cover you want.
If you’re considering executive income protection, get in touch with a specialist IFA who can answer your questions and compare quotes from leading providers.