If you are a Director of a limited Company you may be entitled to take out an Executive Income Protection policy rather than a standard personal plan. This can be a very interesting prospect as the premiums for cover will be funded by your company rather your personal bank account.
Directors Income Protection vs Personal Income Protection
Income Protection for Company Directors can be taken on a personal basis. This would be the same as any employee or sole trader taking out cover; you pay from you personal account and thus your nett income (after tax).
As an alternative to this certain Income Protection plans can be funded by your limited Company. The main benefit being that the premiums are classed as a trading receipt to your Company and thus are not taxed as a P11D benefit (benefit in kind). As a Company Director this can be very appealing.
If there are multiple Directors in the Company you should of course discuss and document the agreement of cover within your minutes before applying for cover.
Are the Payouts Taxable?
If you take a personal plan and thus do not get tax relief on the premiums then most plans will pay you a monthly income that is free of tax and NI. This will normally be paid into your personal bank.
If however you opt for the Executive Income Protection for Company Directors then the proceeds of the policy upon a successful claim will be paid out to your Company rather than your personal bank account. How you then pay yourself will be up to you, but you should be aware that if the money is paid out as salary it will be subject to tax and NI.
How Much Income Protection am I Eligible for?
As a Company Director you are likely to pay yourself in either salary or a combination of salary and dividends. Most Income Protection for Company Directors will allow you to declare both salary and dividends as income so long as the dividends would stop in the event of a claim. You should be careful and check the eligible income definition as some companies look at an average of your last 12 months income and some look at the last 36 months.
Most personal Income Protection policies allow cover for 50-65% of your income, however most executive policies offer cover for up to 75-80% as they assume the benefit will be taxed when paid to the Director.
In many circumstances Company Directors may employ a 'Company Secretary' and split their income with them. If the 'Company Secretary' is not essential to the business, e.g. a Director employing his/her spouse to look after the books, then some insurance providers will allow their dividend income to be added to your own to form the eligible income. Please do check with your adviser/broker to see if the insurer you are considering offers this.
Income Protection for Company Directors - Personal or Executive?
This is up to you and your financial adviser, there are pros and cons to both options. The important thing however is to make sure that you have some Income Protection cover in place.