Company-paid cover
for directors.

What is executive income protection?

Executive income protection is a single-life version of group income protection. The company is the policyholder and premium payer; the employee or director is the life assured.

When a valid claim is made after the chosen deferred period, the insurer pays the benefit to the company. The company then pays it to the individual through payroll as earnings, subject to PAYE and National Insurance in the normal way.

That routing is the single most important thing to understand about the product, and the point most often glossed over in marketing.

How much of a director's package it can insure

A personal policy generally insures salary only, which is a problem for directors who take a small salary and the balance in dividends. Executive cover is usually more generous: most insurers will consider salary plus dividends drawn from the company, provided the dividends genuinely relate to the individual's work rather than passive shareholding.

Cover can typically also include employer's National Insurance and employer pension contributions, so the company is not left funding those from reduced trading income while the director is off.

The maximum is generally expressed as a percentage of that total package, commonly around 80% including the additional elements. Insurers differ, which is exactly the sort of variation that makes whole-of-market comparison worth doing.

The tax treatment and the PAYE catch

Premiums are normally an allowable business expense for corporation tax where they meet the wholly and exclusively test, and are not usually assessed as a benefit in kind on the director. That is the advantage.

The catch is on the way out. Because the benefit is paid to the company and then passed through payroll, it is taxed as employment income, income tax and National Insurance apply. A personal income protection policy paid from taxed income pays its benefit tax-free.

So the comparison is relief on the way in against tax on the way out, and the right answer depends on the individual's tax position and the company's. Because the benefit is taxable, executive cover is normally arranged for a higher gross amount so the net figure reaching the director is adequate. Tax treatment depends on your individual circumstances and may change in the future.

Executive vs personal income protection

Executive cover suits salaried directors of limited companies who take dividends, want employer NI and pension contributions insured, and would rather the company carried the cost. It ends if you leave the company.

Personal income protection suits the self-employed, sole traders, equity partners and anyone who wants cover that is independent of an employer. The benefit is paid tax-free and the policy follows you.

Neither is universally better. For a director of their own company with a typical low-salary, high-dividend structure, executive cover often wins on the numbers, but it has to be modelled rather than assumed.

Deferred periods and payment terms

The deferred period is how long you wait after becoming unable to work before the benefit starts, commonly 4, 8, 13, 26 or 52 weeks. A longer deferred period means a lower premium. Set it against how long the company could realistically keep paying the director from its own resources.

The payment term is how long the benefit keeps paying once a claim starts. Full-term cover pays until recovery, retirement or the end of the policy. Limited-term cover pays for a capped period, usually one, two or five years, and costs less. For a genuinely serious long-term condition, limited-term cover can stop long before the need does.

Cover Your Family is not FCA regulated and does not give advice. A separate, FCA-regulated adviser will model the tax position and structure the cover, at no cost to you or your company.