What is executive income protection?

Executive income protection is a company-funded insurance policy that helps protect the income of a limited company director or employee if illness or injury prevents them from working.

Unlike a personal income protection policy, executive income protection is owned and paid for by the limited company. If a valid claim is made, the insurer pays a monthly benefit to the business, which can then continue paying the insured employee.

It does not cover redundancy, the loss of a contract or a lack of available work.

For many directors, executive income protection offers a tax-efficient way of protecting both their business and personal finances during a prolonged period of illness.

Why do company directors use executive income protection?

Many owner-managed companies rely heavily on one person. If the director becomes unable to work, the company’s income may fall while personal financial commitments continue.

Unlike employees of larger organisations, directors often have little or no employer-funded sick pay beyond what the company can afford to provide itself.

Executive income protection helps address this risk by providing a monthly benefit that allows the company to continue supporting the insured employee while they recover.

Depending on the insurer, cover can often be based on both salary and regular dividends, making it particularly attractive for directors who take a modest PAYE salary and the remainder of their remuneration as dividends.

How does executive income protection work?

When arranging a policy, you will normally choose:

Benefit level: Many insurers allow cover of up to around 80% of pre-incapacity remuneration, subject to their own underwriting limits and policy terms.
Deferred period: This is the waiting period before payments begin. It can range from a week to twelve months. Longer deferred periods generally reduce premiums but require you to rely on savings or company reserves for longer. Our guide to how much income protection you may need explains this in more detail.
Benefit term: Benefits can be paid for a fixed period or continue until recovery, retirement or the policy end date. See our guide to short-term vs long-term income protection.
Indexation: Some policies allow the monthly benefit to increase in line with inflation, helping to preserve its purchasing power during long-term claims.

Once the policy is in place, the company pays the premiums. If you later become unable to work because of an insured illness or injury, and satisfy the policy definition of incapacity, the insurer pays the agreed monthly benefit to the company.

The company can then continue paying you through its usual payroll or remuneration arrangements.

What does executive income protection cover?

Executive income protection is designed to replace a proportion of your income while you are unable to work.

Depending on the insurer, cover may include:

PAYE salary.
Regular dividend income linked to your work for the company.
Employer pension contributions.
Employer National Insurance contributions.
Certain taxable benefits provided through the business.

Not every insurer assesses director remuneration in exactly the same way. Some providers include dividends more generously than others, while some apply additional evidence requirements where company profits fluctuate.

Another important feature is how incapacity is defined. Many advisers recommend an own occupation definition wherever available, as this provides cover if you are unable to carry out your own job rather than any job.

How is executive income protection taxed?

One of the main advantages of executive income protection is its tax treatment.

Where the policy is arranged correctly, HMRC generally accepts that premiums may be treated as an allowable business expense (see BIM46035).

This typically means:

The company may be able to deduct the premiums when calculating its taxable profits.
The premiums are not normally treated as a benefit-in-kind for the insured employee.
If a claim is made, the benefit is usually paid to the company and treated as business income.

The precise tax treatment depends on the circumstances, which is why we’ve produced a separate guide explaining the tax treatment of executive income protection in more detail.

Executive income protection vs personal income protection

Although both types of policy provide financial support if illness prevents you from working, there are important differences.

Executive income protection is owned and funded by the company, while personal income protection is arranged and paid for by the individual.

This affects:

Who pays the premiums.
Whether Corporation Tax relief may be available.
How claim payments are made.
The proportion of income that can often be insured.

Personal income protection remains the appropriate option for sole traders and many self-employed individuals who do not operate through a limited company.

Is executive income protection right for you?

Executive income protection is commonly used by owner-managed businesses, consultants, contractors and other professionals who operate through limited companies.

If your personal finances depend on your ability to continue working, protecting that income can be just as important as protecting the business itself.

Before choosing a policy, consider:

How long you could manage without income before claim payments begin.
Whether short-term or long-term cover better suits your circumstances.
Whether inflation protection is important.
Whether the policy uses an own occupation definition of incapacity.
How your insurer assesses salary, dividends and other company benefits.

A regulated adviser can explain the differences between providers and recommend the most suitable policy for your circumstances. If you’d like to compare available options, you can request an executive income protection quote through our FCA-regulated partner.