What happens to executive income protection if you close your company?
Executive income protection is owned and paid for by your limited company, so closing the company can affect the cover you have in place.
You may be able to continue the protection in another form, move to personal income protection or arrange replacement cover. The options depend on the insurer, the policy terms and what you plan to do next.
Why does closing the company affect your policy?
With executive income protection, your company is normally the policyholder.
It pays the premiums and, if you make a successful claim, the insurer pays the benefit to the company. The business can then use the money to continue paying you while you are unable to work.
This is different from personal income protection, where you own the policy yourself and receive any claim payments directly.
Once the company closes, the original executive arrangement may no longer work as before.
Does the policy automatically end when your company closes?
Not necessarily, but you should not assume the cover can simply carry on unchanged.
The options available vary between insurers. Depending on the policy, it may be possible to alter the arrangement or replace it with personal cover.
There may also be deadlines or conditions attached to any continuation option.
Contact the insurer or adviser before the company closes so you know what options are available.
Can you convert executive income protection to a personal policy?
Some insurers may allow executive cover to be changed or replaced when your circumstances change.
Whether this can be done and whether fresh medical underwriting is required depend on the policy.
This can be particularly important if your health has changed since you originally took out the cover.
If replacement personal cover requires a new application, the insurer will normally assess your age, health, occupation and income at that point. A medical condition which developed after your executive policy started could therefore affect the terms of the new cover.
For that reason, avoid cancelling an existing policy until you know whether replacement cover has been accepted and on what terms.
What if you close your company and become an employee?
If you take a permanent job after closing your company, personal income protection may be an option.
You should also check what your new employer provides.
An employment package might include:
- contractual sick pay;
- group income protection;
- death in service cover; or
- other employee benefits.
These benefits can change the amount of personal protection you need.
The deferred period is particularly important. If a new employer provides six months of full sick pay, for example, you may not need an income protection policy which starts paying after only four weeks.
What if you start another limited company?
If you close one company and start another, don’t assume the executive income protection policy automatically transfers to the new business.
The existing company owns the policy, while the new company is a separate legal entity.
Ask the insurer whether the policy can be transferred or amended, or whether a new executive policy is required.
Your new remuneration may also be different, particularly during the first year of trading. This can affect the amount of income the insurer is prepared to cover.
See our guide to salary and dividends for income protection for more on how director income is assessed.
What if you leave the company but it continues trading?
A similar issue arises if you leave your company without closing it.
For example, you might sell your shares, resign as a director or stop working for the business following a sale.
The company may still exist, but the reason for it providing executive income protection for you has changed.
You should check what happens to the policy before leaving. Depending on the insurer and the circumstances, you may need personal cover or a new policy provided by your next employer or company.
What if you become a sole trader?
A sole trader cannot arrange executive income protection in the same way as a limited company.
This is because there is no separate company that employs you and owns the policy.
If you move from a limited company to sole trader status, personal income protection is likely to be the relevant type of cover.
Any new insurer will need to establish your insurable earnings, which can be more difficult if you have only recently become self-employed.
What if you are already claiming when the company closes?
This needs to be dealt with carefully.
Under executive income protection, the company normally receives the claim payments. Closing the company while a claim is being paid could therefore affect how those payments are received and passed on to you.
Do not assume that winding up the company has no effect simply because the insurer has already accepted the claim.
Speak to the insurer and your accountant or tax adviser before taking steps to close the business while a claim is in payment.
Our guide to executive income protection tax looks at how claim payments are normally treated when they are received by the company.
What if you stop trading but keep the company open?
Some directors stop taking new work but leave their company open for a period rather than closing it immediately.
Keeping the company registered does not necessarily mean an executive income protection policy should continue unchanged.
The insurer offered the cover on the basis of information about your employment, occupation and earnings. If these have materially changed, tell the insurer and check whether the existing cover remains suitable.
Could your new income affect the amount of cover?
Yes.
Income protection is intended to replace part of the income you lose when you cannot work.
If you move from running a profitable limited company to a lower-paid job, to starting a new business, or to becoming self-employed, the amount of cover available may change.
This is particularly relevant to directors whose original policy was based on a combination of salary and dividends.
Our guide to how much executive income protection you need covers the way benefit levels are calculated.
Don’t cancel your existing cover too soon
One of the main risks when changing working arrangements is cancelling existing cover before the replacement is in place.
Your health may have changed since the original policy was taken out. You are also older, and your occupation or income may be different.
A new application could therefore cost more, contain exclusions or be declined even though your existing policy was arranged on good terms.
This is particularly important if you have developed a medical condition since taking out the policy.
See our guide to executive income protection and pre-existing medical conditions for more on how health can affect a new application.
What should you do before closing your company?
Check your executive income protection alongside the other financial arrangements involved in closing the business.
In particular, find out:
- whether the existing policy can continue;
- whether it can be converted or replaced;
- whether fresh underwriting will be required;
- what cover you will have through your next job or business;
- whether your new income supports the same benefit level; and
- when the existing policy should actually be cancelled.
If you still need income protection, find out what replacement cover is available before giving up your existing policy.