Short-term vs long-term executive income protection
You can choose an executive income protection policy that pays out for a fixed period, typically one, two or five years, or long-term cover that can continue for many years if you’re unable to return to work.
Short-term cover is cheaper. The trade-off in return for the lower premiums is that payments will end after the agreed benefit period has expired, even if you’re still unable to work.
Short-term vs long-term at a glance
| Feature | Short-term cover | Long-term cover |
|---|---|---|
| Typical benefit period | 1, 2 or 5 years | Until recovery, retirement or policy expiry |
| Premium | Usually lower | Usually higher |
| May suit | Directors with savings or other financial support | Directors who want protection against a lengthy absence from work |
| Long-term illness | Payments stop at the end of the benefit period | Payments can potentially continue for many years |
How short-term cover works
Short-term executive income protection pays a monthly benefit for a limited period after a successful claim.
Common benefit periods are one, two or five years. Once that period finishes, payments stop even if you’re still unable to work.
Short-term cover usually costs less than an equivalent long-term policy.
Short-term cover can work well if you have enough savings or other income to fall back on. Just bear in mind that payments will stop at the end of the benefit period, whether you’re fit to return to work or not.
How long-term cover works
Long-term cover is designed for the possibility that you could be off work for several years.
As long as you still meet the policy conditions, payments can continue until you return to work, reach the agreed retirement age or the policy ends.
You’ll usually pay more for this than short-term cover because there’s no one, two or five-year cut-off on a claim.
For more information on exactly how benefit periods work, read our guide to how long income protection can pay you for.
Which option suits company directors?
If you have substantial savings, investments or other income, you may be comfortable with a policy that stops paying after one or two years.
If your household relies heavily on the money you earn through your company, think about what would happen if you were unable to work for much longer.
Questions worth asking include:
- How long could you manage without your normal income?
- Would your company still be able to pay you during a lengthy illness?
- How much do you have in accessible savings?
- Does anyone else rely on your income?
- What would you live on when a short-term policy stopped paying?
The important figure isn’t just the monthly premium. It’s how long you could manage financially if a claim came to an end and you still couldn’t work.
Don’t overlook the deferred period
The benefit period is the length of time the insurer will pay a claim. The deferred period is the wait before those payments begin.
Choosing a longer deferred period will usually reduce the premium and can work well if you have enough savings or company funds to manage during the first few months.
For more information on the options available, read our guide to income protection deferred periods for company directors.
How much more does long-term cover cost?
You’ll normally pay more for long-term cover, as a claim could run for many years.
It’s worth looking beyond the headline premium to check how much each policy pays and when payments would stop.
For more information on pricing, read our guide to the cost of executive income protection.
What about tax?
Your limited company pays the premiums for executive income protection, rather than you paying for the policy personally.
The company may be able to claim the premiums as a business expense. If you make a successful claim, the insurer normally pays the benefit to the company, which can then use the money to continue paying you.
Read more in our guide to executive income protection tax.
Which offers better protection?
Long-term cover provides more protection because a qualifying claim can potentially be paid for much longer. Whether that extra protection is worth the higher premium depends on your finances and how much risk you’re comfortable taking yourself.
Short-term cover may be perfectly adequate if you have the resources to support yourself after the benefit period ends. If you don’t, the extra cost of long-term cover may be worth considering.
A specialist IFA can compare short and long-term cover from leading providers and show you how the premiums and benefit periods differ.