Directors of limited companies may qualify for an Executive Income Protection insurance policy instead of the traditional income protection plan.
The premiums for this type of plan are covered by the policy holder’s company instead of through their personal bank account. This insurance product can be taken out on a personal basis, which would be the same process as any sole trader or employee purchasing this kind protection and paying for it on their own.
An alternative for this could be taking out a specific income protection policy funded by the policy holder’s limited company. The main benefit of approaching income protection in this way is the premiums for this coverage are classed as a trading receipt for the company and are not taxable as a P11D benefit.
Company directors often find this approach to income protection policies very appealing. If there is more than one director for the company, it is important to discuss the options and document the agreement to purchase the coverage before placing an application.
When is Income Protection for Company Directors Taxable?
For those taking out a personal income protection plan and paying the premiums through their own bank account, the payout from this coverage will not be taxable and the funds will be deposited into the policy holder’s personal bank account.
Should they choose the Executive Income Protection for Company Directors policy paid for through the company and are successful in filing and being awarded a claim, the money will be given to the company and paid out to the beneficiary as salary payments, which means it will be subject to taxes and NI.
How Much Income Protection Are Directors Eligible for?
Company directors will likely pay themselves in either straight salary or a combination of dividends and salary. Many Income Protection for Company Director policies allow the policy holder to declare both dividends and salary as income as long as the payment of dividends would stop when a claim is made.
Those who are seeking this type of policy should be careful to double check what types of income fall into the eligible definition – some companies will look at the last year of income while others will evaluate the last 36 months of income when making certain insurance policy decisions.
Many personal income protection coverage policies will cover between 50 and 65 percent of the policy holder’s income but Executive Income Protection for Company Directors polices will cover between 75 and 80 percent of their income, assuming their benefits will be taxed when they are paid. It is important to remember that even though the Executive Income Protection for Company
Directors policy will cover much more income than a personal income protection policy, the policy essentially belongs to the company and it will receive the initial benefit payment and then disperse it to the director.
Additionally, there may be an option to add a “company secretary” to the policy for the company director to split their income with. If the secretary position is not an essential role for the business, the director may employ their spouse to look after financial books, which may allow some of their dividend income to be added to another form of eligible income.
This is not the case for every company or every income protection insurance provider, so it is very important to check with a financial advisor or trusted insurance broker to ensure that the insurers being considered are offering this plan.