What to know about executive income protection
Thinking about executive income protection
What works well
- The company funds cover the director might not fund personally.
- Pension contributions and employer NI can be included.
- Cover can be set against total remuneration, not just salary.
What to watch
- Benefit is taxed through payroll on the way out.
- Dividend income may not count fully as insurable earnings.
- The payment route depends on the company continuing to exist.
How the money actually flows
The mechanics are what distinguish executive income protection from a personal policy. The company is the policyholder and pays the premium; the insured person is the employee or director. On a valid claim the insurer pays the company, and the company pays the person through payroll, so income tax and National Insurance are deducted as they would be on salary — HMRC treats employer-funded sick pay as taxable earnings.[3] Because the benefit is taxed on the way out, the cover can usually be set at a higher percentage of remuneration than a personal policy — and, on many contracts, can include employer pension contributions and the employer’s National Insurance on top of salary replacement. For directors of small companies, two points need care. First, "earnings" for a director often mixes a small salary with dividends, and insurers differ on how much dividend income they will treat as insurable — get the definition in writing before applying. Second, if the company would stop trading during a long absence, ask what happens to the policy and the claim, because the payment route runs through a payroll that must still exist. The deferred period, the benefit period and the incapacity definition work exactly as they do on a personal policy. HMRC’s business manual allows relief on premiums for insuring against the loss of a key person’s services, including through sickness, where the sole purpose is to meet a loss of trading profit[1], and the employer’s own Statutory Sick Pay duty, for up to 28 weeks, sits alongside any policy.[2]
Get the insurer’s definition of insurable earnings in writing, including dividend treatment, and ask your accountant to confirm the corporation tax and payroll treatment before the policy starts. Whatever the specifics of executive income protection, the discipline that protects the business is always the same: record who owns the policy, who receives the money and which agreement directs it; get the insurer’s and the accountant’s position in writing; and review the arrangement whenever the people, the shareholdings or the borrowing change.
Related guides
Looking at cover with PremierPMI
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Common questions
Why does the benefit get taxed through payroll rather than paid directly to the director?
What should a director check about how dividend income is treated before taking out cover?
What happens to a claim if the company itself stops trading during a long absence?
Sources and methodology
- [1] HM Revenue & Customs. “Business Income Manual BIM45525: key persons insurance”. View source(opens in a new tab)Primary source
- [2] GOV.UK. “Statutory Sick Pay”. View source(opens in a new tab)Primary source
- [3] HM Revenue & Customs. “EIM06410: sick pay funded by the employer — permanent health insurance”. View source(opens in a new tab)Primary source
We cite primary sources wherever possible. Read about our sourcing methodology.
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