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.
Choose enough cover to maintain your normal standard of living without paying for more insurance than you realistically need.
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, this may include:
- 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.
A regulated adviser can explain how each insurer assesses director remuneration and the maximum benefit available.
Choosing a deferred period
The deferred period is the time between stopping work and the start of benefit payments.
Common options include 4, 8, 13, 26, and 52 weeks.
A longer deferred period usually reduces the premium, but you’ll need sufficient savings or company funds to bridge the gap.
Many directors choose a deferred period that reflects how long the business could continue paying their remuneration before insurance payments become necessary.
Our guide to short-term and long-term income protection explains how different policy structures affect both cost and cover.
How long should benefits be paid?
Executive income protection can be arranged with either a limited or long-term benefit period.
Short-term policies commonly pay for one, two or five years per claim.
Long-term cover can continue until recovery, retirement or the end of the policy term.
Although long-term policies generally cost more, they provide greater protection against illnesses that permanently prevent you from returning to work.
Should you add inflation protection?
Many insurers allow benefits to increase each year in line with inflation.
This helps preserve the value of your cover if a long-term claim continues for several years.
Adding indexation usually increases premiums, but it can prevent the purchasing power of your monthly benefit from gradually falling over time.
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.
- Existing employer sick pay.
- Other insurance policies.
Executive income protection is designed to work alongside these resources rather than necessarily replacing all of your income.
What about tax?
Where executive income protection is arranged correctly, company premiums may qualify as an allowable business expense.
Successful claim payments are generally made to the company and treated as taxable business income before remuneration continues to the insured director.
Our guide to executive income protection tax explains how premiums, claims and benefit-in-kind rules normally apply.
Finding the right level of cover
For many company directors, the objective is not to insure the highest amount possible but to ensure that essential financial commitments can still be met if illness prevents them from working.
A regulated financial adviser can recommend an appropriate benefit level based on your salary, dividends, company finances, deferred period and existing savings.
If you’d like to compare executive income protection policies, you can get a quote and discuss the most suitable level of cover for your circumstances.