The Executive Income Protection plan is different to a personal Income Protection policy in that the policy is owned by the business the employee works for, rather than the individual who is actually insured. It is a particularly attractive benefit to offer an employee, as it can offer them a financial safety-net, in the event of them being unable to work and it does not count as a P11D benefit, so they have no tax liability from it.
Due to the additional flexibility and tax efficiency of Executive Income Protection it can be a very attractive alternative to personal income protection cover for small businesses and one person limited companies. Monthly premiums are an allowable expense against company profits if the policy is set up correctly, so it can be very tax efficient for the business too.
Benefits of Executive Income Protection
- Premiums tax deductible
- No P11D benefit for employee
- Flexible use of payments
- Cover more expenses than personal IP
- Cover a higher amount of income than personal IP
Like a personal Income Protection plan, the cover pays out in the event that the life assured is unable to work due to accident or illness, however, the income is paid into the business rather than being paid directly to the insured person. This payment arrangement provides additional flexibility for the business. The benefit can be paid to the employee or retained in the business as financial support against the loss of a key staff member, or even a bit of both. This additional payment flexibility can be particularly attractive to small businesses and one person limited companies.
Executive Income Protection plans can cover up to 80% of an individual’s gross income, which includes PAYE salary, dividends and P11D benefits. In addition, employer national insurance and pension contributions can be covered under the policy, which can be particularly prudent where the pay-out period is to retirement age. Payment to the life assured from the policy will be taxed as PAYE, so this should be factored in when calculating the benefit amount required.
Options to consider when taking out a policy are shown below.
- The amount of benefit – The maximum annual sum assured is currently £300,000 and it must also be below 80% of the employee’s total allowable income.
- Level or Increasing benefit – increasing benefit stays in line with inflation or increases annually at a set rate e.g. 5%.
- Illness period before pay-out - Deferred periods are available for 4, 13, 26 and 52 weeks and premiums reduce as deferred periods increase.
- Pay-out term – Policies can pay-out for 2, 3, 5 years or to retirement age.
- Term – the minimum term is usually 5 years whilst most policies are written to a maximum age of 70.
- Guaranteed or reviewable premiums.
Whether to include National Insurance and company pension payment coverage.
Comparison of Executive and Personal Income Protection
|Executive Income Protection||Personal Income Protection|
|Policy owner||Employing company||Life assured|
|Cover allowed||Max 80% of allowable income plus company NI / pension contributions||Max 70% of allowable income|
|Taxation of pay-out||Taxable as business revenue or PAYE if paid to employee||No tax to pay|
|Premium tax position||Tax deductible for business and no benefit in kind of employee||Tax deductible for business but benefit in kind for the employer|
|Benefit paid to||Paid into the business||Paid directly to the employee|
|What can be covered||Salary/Dividends/Company National Insurance/ Company Pension Contributions/ Company Life Insurance Contributions||Salary/ Dividends/ P11D benefits|
|Who can arrange||Adviser only||Adviser or individual with some insurers|
|Pay-out duration||2, 3, 5 years or to retirement||1, 2, 5 years to retirement|
|Deferred periods||4, 13, 26 or 52 weeks||0, 1, 2, 4, 8, 12, 26 or 52 weeks|
The additional complexity of Executive Income Protection is recognised by the insurers in that they only allow qualified advisers to arrange these policies, so if you are considering taking out this type of cover we can put you in touch with an adviser to talk you through your options and get you the best available premiums.
If you are also considering group income protection or even employee private medical and death benefits then the advisers we can recommend are also able to offer advice in these areas.