Income protection vs life insurance for company directors
Income protection and life insurance cover two very different events.
Income protection pays a regular benefit if illness or injury leaves you unable to work. Life insurance pays out if you die during the policy term.
Both can be arranged through a limited company. Executive income protection covers a director’s income, while relevant life insurance provides life cover paid for by the company.
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 illness or injury prevents you from working.
The limited company owns the policy and pays the premiums. If a claim is accepted, the benefit is normally paid to the company, which can use the money to continue paying you.
Cover may include PAYE salary and, depending on the insurer, dividends arising from your work for the company. This is particularly relevant if you take a small salary and the rest of your income as dividends.
Payments start after the deferred period. Depending on the policy, they may continue for a fixed number of years or until you recover or reach the policy end age.
Company-paid premiums may qualify as an allowable business expense. Claim payments received by the company are generally taxable.
Our guide to executive income protection tax covers this in more detail.
How life insurance works
Life insurance pays out if you die during the policy term.
The money can give your family a financial cushion after your death and might be used to:
- repay a mortgage or other debts;
- replace some of the income you previously brought into the household;
- cover household bills;
- pay for childcare or education; or
- provide savings for the future.
You can buy life insurance personally and pay the premiums yourself. If you run a limited company, relevant life insurance may provide another option.
What is relevant life insurance?
A relevant life policy is life insurance paid for by an employer for a director or employee.
The limited company pays the premiums. These may qualify as an allowable business expense where the relevant conditions are met and aren’t normally treated as a benefit-in-kind for the insured director.
Relevant life cover is usually written into trust. If the insured person dies, the claim is paid to the trustees for the benefit of the chosen beneficiaries.
The company doesn’t normally receive the death benefit.
That’s an important difference from executive income protection, where the company normally receives the monthly claim payments.
Do you need both income protection and life insurance?
Potentially, because they cover different risks.
If you die, income protection isn’t designed to provide your family with the lump sum available from life insurance.
But life insurance won’t replace your monthly earnings if you’re alive and unable to work for several years.
For example, relevant life insurance could provide money to clear or reduce the mortgage if you died. Executive income protection could help replace some of your earnings during a lengthy illness.
There’s also critical illness cover, which pays a lump sum following a qualifying diagnosis. See our comparison of income protection and critical illness cover.
Which type of cover is more important?
That depends on what would cause the bigger financial problem.
If you have a mortgage, children or other people who depend on your income, think about what would happen to them financially if you died.
Then consider the alternative: you’re still alive, but an illness or injury keeps you away from the business for a year, five years or perhaps permanently.
Life insurance deals with the financial consequences of your death. Income protection deals with the loss of earnings while you’re still alive.
Your savings, company reserves and any sick pay available will also affect how much income protection you need.
See our guide to income protection vs sick pay.
Can the company pay for both?
Potentially, yes.
Executive income protection and relevant life insurance can both be company-funded, although they’re separate policies with different tax treatment and claim arrangements.
With executive income protection, a successful claim is normally paid to the company.
With relevant life insurance, the death benefit is normally paid through a trust for the beneficiaries.
Personal life insurance remains an option as well, although the premiums are then paid from your own post-tax income.
Choosing your cover
Rather than treating income protection and life insurance as alternatives, look at the financial problem each policy is intended to cover.
How would you manage if you couldn’t earn for several years? And what would your family need if you died?
If you want both types of cover, the company can potentially pay for executive income protection and relevant life insurance.
A specialist IFA can review the available policies and what each would cost through the company.