Executive Income Protection: A Comprehensive Guide

The worry over financial health can be as bad as the worry over physical health.

For those who run their own business and don’t have the luxury of sick pay benefits to fall back on OR for those businesses who employ high-earning executives who expect certain benefits to be provided as part of their employment, Executive Income Protection can play an important role in both protecting those people and aiding the recruiting and retention of them.

Executive Income Protection offers a tailored solution to ensure financial stability during period of ill-health or incapacity.

Here’s an overview of how it works and the tax advantages it offers.

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What is Executive Income Protection?

Executive Income Protection is an insurance policy arranged by a business to provide income replacement for key employees, directors, or owners in case they are unable to work due to illness or injury.

This specialized policy bridges the gap between standard employee benefits, such as short-term sick pay and personal protection plans by offering a more robust and tax-efficient financial safety net.

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How is Executive Income Protection Arranged?

1. Policy Setup: The employer arranges the policy, typically in the name of the business. The benefit amount is aligned with the individual’s salary or a percentage of their income, often up to 80%.

2. Underwriting: Insurers assess the risk by considering factors such as the employees occupation, their age, smoker status, health history, and income level. Premiums are calculated accordingly.

3. Customizable Features:

• Deferred Period: A waiting period before the policy starts paying out. This is usually between 4 to 52 weeks. The longer the deferred period, the cheaper the premiums.

• Benefit Duration: The length of time payments continue, often until retirement age or for a set period, such as 12-months or 2-years.

• Pension provisions: Whilst a personal income protection plan can protect an individuals standard of living throughout their working life, Executive Income Protection goes one step further. By ensuring pension payments continue during periods of incapacity it can ensure that standards of living in retirement can also be maintained.

• National Insurance contributions: The company can choose to cover their liability for NI contributions in the event of a claim. This not only helps to reduce the burden on the business, especially for business which employ a small number of high enough individuals but it can also ensure the incapacitated person still qualifies for a full state pension in the event of long-term incapacity.

  
  

4. Payment: The business pays the premiums, which qualify as a genuine business expense, ensuring that it is a cost-effective and seamless process.

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Tax Advantages of Executive Income Protection

1. Tax-Deductible Premiums: Premiums paid by the employer are typically considered a business expense, making them tax-deductible under corporate tax rules. This reduces the overall cost to the business.

2. Tax-Free Benefits: Benefits are received by the business without deduction. However, when paid to the employee/business owner they are done so on a P.A.Y.E. basis meaning that tax and NI contributions are deductible.

3. No Benefit in Kind: Unlike some employee benefits, Executive Income Protection policies often do not count as a taxable benefit in kind for the employee.

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Why Consider Executive Income Protection?

• Comprehensive Coverage: Tailored to meet the needs of high-earning executives or directors.

• Business Continuity: Ensures financial stability for the individual and the company.

• Employee Retention: Demonstrates a commitment to the well-being of key staff, improving morale and loyalty. Imagine a potential high-flying employee being interviewed by 2 firms, both whom are equally attractive apart from the following: Company A offers 3-months sick pay entitlement before reverting to Statutory Sick Pay. Company B offer 3-months sick pay AND continuing benefit via a long-term income protection plan which pays 80% of their income for as long as they are unable to work....

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Executive Income Protection is an essential tool for businesses looking to safeguard their most valuable assets—their people. By combining robust financial protection with compelling tax advantages, it provides peace of mind for both employers and employees.

If you wish to discuss this cover or any other business related protection policies then please don’t hesitate to contact me.

Simon Dunn

simon.dunn@four-nations.co.uk

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