Executive income protection
What is executive income protection?
Although it is essentially the same as for any other working person, income protection for people with executive status includes extra provisions. These not only protect the often more complex income of the individual, they also take account of their vital role in the running of a business.
If a business-owner, director, executive or high-earning professional falls ill or gets injured and is unable to work for weeks or even months not only could their income suffer, they may be unable to carry out the responsibilities of their senior position. Executive income protection – also known somewhat archaically as ‘key man income protection’ - is designed to cover all these eventualities.
What does executive income protection cover?
A comparison of executive income protection vs personal income protection shows that the executive version is considerably more extensive. It can temporarily replace not just one but several income streams.
Salary
The most significant asset it protects is an executive’s salary. High-earners can be as vulnerable as anyone else to the impact of a sudden loss of income on the lifestyle they’re used to and their ability to support family and dependants.
Overtime and bonuses
Most senior employees may not have formal overtime arrangements, but if they do, executive income protection can cover them. Much more common are executive bonuses and even though they may vary from year to year, they form a significant part of an executive’s pay package. Insurance is an effective way of protecting them.
Dividends
If an executive is contractually entitled to dividends through ownership of shares in the company they work for, these too can be protected by insurance.
P11D Benefits
P11D benefits are taxable benefits in kind, provided by the employer. Perks can range from free bus travel and gym membership to paid sabbaticals and luxury accommodation. If an executive’s entitlement to substantial benefits relies on their uninterrupted service, then an enforced break from work could make these financially unsustainable for the employer. Again, executive income protection can provide support.
Pensions and national insurance
Making regular contributions is vital in sustaining the value of private and state pensions. If a senior employee is unable to earn, their ability to contribute could be compromised, so income protection can be used to maintain the payments.
Spouse or civil partner
Some executive income protection policies will even extend their protection to the dividends of the insured’s spouse or civil partner, provided they do not perform a function that generates revenue and are only engaged in an administration role, for example.
Key features
Ownership of the policy
Unlike personal income protection plans, executive income protection policies, like group income protection policies, are typically taken out by the employer. If the insured is also an owner of the company, it will still be the company rather than the insured who owns the policy. The premiums are paid by the employer and in the event of a claim the payout is made to the company which passes on the proceeds to the executive.
Coverage
Personal income protection policies usually cover no more than 70% of the insured’s income. With executive income protection it’s possible to cover up to 80%.
Special terms and conditions
Policy terms, such as how long the benefit payments will last, can often be customised to suit the circumstances of the insured and may be more flexible than in personal policies. It’s also possible to choose whether the premiums are paid by the company or the insured. HMRC’s approach to executive income protection tax treatment means that personal premium payments are not taxable as a benefit in kind whereas company payments could be.
Additional benefits
It’s common for executive income protection to include valuable extras such as
- Access to health resources
- Critical illness cover
- Rehabilitation services
Benefits of executive income protection
For the employee
It gives both financial security and the reassurance of worry-free living, knowing that their income is secure. It can be a very attractive element of a remuneration package.
For the employer
Executive income protection helps to support the employee until they can return to their crucial role and offsets some of the costs incurred in looking after their job functions while they’re out of action. It is a form of business income protection, ensuring continuity and stability in the business.
Issues to consider
Since executive income protection can be more complex and the coverage more extensive, there are a number of considerations to address when planning to take out a policy.
Underwriting
The underwriting process, which assesses risk and eligibility, can be more demanding than for a standard policy. In particular, the investigation of possible health issues can be especially rigorous, possibly involving detailed medical histories and even examinations.
Exclusions and limitations
All income protection policies carry exclusions for things like pre-existing health conditions, self-inflicted injury and dangerous activities, so it’s important to find a policy that features the fewest possible limitations.
Key terms
Most policies allow you to adjust the essential terms, such as how long the policy will pay out in the event of a claim and the time between making a claim and receiving the first monthly payment. For the policy to be most effective, these terms should be set to achieve the best alignment with your financial and business needs.
Premiums
The cost of executive income protection is calculated according to several factors, including the age and health of the insured, their occupation and the amount of cover required. It’s important to gather enough quotes from different insurers to make a meaningful comparison.
Claiming on executive income protection insurance
The claims process for executive income protection follows essentially the same procedure as in standard policies.
Notification
The insurer must be told as soon as possible that the insured has become ill or injured and has to stop working.
Documents and evidence
Along with a completed claim form, they will need to see written evidence from a doctor or other suitable healthcare professional, confirming that the illness or injury makes it impossible for the insured to continue working. They will probably also require proof of lost income.
Assessment
The insurer will then evaluate the claim based on the evidence provided and the terms of the policy. At this stage they may ask for supplementary information. If they approve the claim they will start to make payments at the end of the waiting period specified in the policy.
Benefit payments
The policy is owned by the business, so it is the business that receives the benefit payments from the insurer. The business then pays the insured from the proceeds.
FAQs
It depends on the insurer but it’s fairly common for policies to impose an age limit of 70. For some occupations there might be a lower limit, especially if there is a significant physical aspect to the job.
No. Like all income protection insurance, executive income protection exists solely to provide a replacement income when the insured is unable to work. It cannot be cashed in, sold or borrowed against.
No, the policy must be owned by a business, which is a limited company or a partnership. It’s possible to set up a business with you as its sole employee and buy the policy through the business, but it’s not available to sole traders without that business structure.
No, the payment that the insured receives from an executive income protection policy is not classed as a benefit of kind so is not taxable as a P11D benefit. However, since the policyholder (the business) receives the payout and then pays the insured through the payroll, that payment can be liable to income tax.
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