The need for Executive Income Protection
Injuries or debilitating illnesses for Directors and Key Staff can have a crippling effect on a business. Executive Income Protection plans can be used to cover the sick pay of these individuals until they are able to return to work, or simply to mitigate the loss of profits and other expenses that their absence can cause.
Executive Income Protection policies are a great way for a business to either reduce financial losses at a difficult time, or to help create valuable employee benefit schemes and retain key staff.
Directors with a 100% shareholding in a business often use these plans, allowing them to protect their own income through the company in the event that they are unable to work in the future.
Pricing structure
There are two main types of Executive Income Protection:
Guaranteed plans - the price will stay the same or only increase if you increase your cover
Reviewable plans - the insurer can increase the cost of your plan as you get older (but cheaper up front)
How fast do payments need to start (deferred period)
Benefit payments start after the employee has been unable to work for an agreed period of time due to illness or injury.
4, 8, 13, 26 or 52 weeks
The longer the deferred period the cheaper the plan
Long-term or Short-term?
This is an important choice, but what is the difference?
Long-term plans give you a tax free monthly income until you are able to return to work or your plan expiry date (retirement)
Short-term plans will typically only pay out for a maximum of 2, 3 or 5 years per claim (cheaper)
The principle of Executive Income Protection is that the benefits paid are used to cover the sick pay of the individual or fund other business expenses that arise as a result of the individual being unable to work.
Executive Income Protection allows an individual to protect up to 80% of their gross income. Some providers will allow pension contributions to be included in this calculation if higher payouts are needed.
Although benefits are paid to the company tax free, it is important to understand that should the business redistribute the funds to the employee, tax will be paid on the benefit at that time as income.
An Executive Income Protection plan is owned by and paid for by a business.
On personal Income protection usually the maximum you can claim is 60% -65% of your gross annual salary.
However on Executive Income Protection it is possible to insure up to 80% of an employee's earnings.
You can choose how long you need it to last, however it can't continue beyond retirement age.
The price will stay the same or only increase if you increase your cover.
The premiums are cheaper but the price will increase each year. These plans are not affected by occupation or lifestyle so are great for higher risk individuals, or those who do a lot of manual labour.
Short-term income protection covers a portion of your monthly income should you suffer an accident or sickness for a maximum of 12 or 24 months per claim.
Long-term income protection covers a portion of your income due to accident or illness until your plan expires or you are fit to return to work.
It depends on how much income you are still receiving; for example: if your maximum allowance is 60% of your normal gross income and you are still receiving 50% of your normal salary, then you will only be able to claim the remaining 10% of your allowance from income protection.
This is why it is important to understand your sick pay benefits, so that you are not paying for cover you cannot use.
Index Linked Income Protection will track with inflation, usually the Retail Price Index.
In practice this means each year you will get a renewal annually; this will likely increase both your cover and your monthly premium.
The cash benefit is paid to the business tax free, however should the business then pass on the funds to the employee in the form of sick pay this would then be taxed as income.
A Deferral Period is the length of time you have to wait after becoming injured or ill before you are able to claim.
The faster you want to claim the more the plan will cost, so the best thing to do is work out how long you could maintain your bills without help using sick pay and savings.
Example: if you have 2 months' sick pay and savings which would last for 1 month, then a deferral period of 3 months would be suitable.
Each plan has a definition of how sick you need to be in order to claim after your deferral period is completed; these are broken down into 3 main categories:
Own Occupation - This is the best definition and means that you can claim if your doctor says you are unable to do your job.
Suited Occupation - This is harder to claim on, but still reasonable; you may not be able to do your job but could you do something similar?
Work Tasks/Activities of Daily Living - This is the least favourable of the options and is usually found on plans covering more hazardous occupations. In this circumstance your injury/illness/disability needs to render you unable to complete a number of simple tasks in order to claim, like reading a newspaper or going to the toilet without assistance.
Waiver of Premium is a form of payment protection; this is so that whilst you are claiming you do not have to continue to pay the monthly premium for your insurance.
Yes - Benefits vary between providers but most offer services such as help with legal issues, secondary medical opinions and in some cases medical assistance and therapies to help you get back to work (which is good for everyone).
These can vary between providers so it is a good idea to check before making a purchase, but often include:
Pregnancy - Non-complex childbirth is not usually covered, however most will still cover complications which arise as a result of childbirth.
Pre-Existing/Chronic Conditions - Conditions diagnosed before you take out your plan are unlikely to be covered. However plans are individually underwritten and so these will usually be explicitly noted as exclusions when you apply.
Self Inflicted Injuries/Illness - If you have failed to follow medical advice which has then led to your inability to work this will likely be excluded. Likewise if you intentionally injure yourself this would also be excluded.
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