Income protection insurance is a type of cover that'll pay out a monthly benefit if you cannot work because of illness or injury. It's designed to give you a reliable monthly income that covers things like your mortgage, rent and bills, whilst you get back on your feet. As a business owner, you've got a couple of choices regarding income protection; you can take out a policy personally or get one via your business by purchasing what's known as Executive Income Protection Insurance. In both instances, the concepts are the same, being that if you can't work, the policy will pay you a monthly benefit, but there are some subtler differences you should consider before deciding which is the best route for you.
Before we get into the differences between buying it through your business and personally, let's explain how income protection for business owners works.
In return for paying a monthly premium, income protection insurance will provide you with a regular income if you're unable to work due to illness or injury. Crucially, you can't cover your entire salary, with personal policies protecting up to 65% of your gross monthly income and business policies (EIP) covering up to 80% + National Insurance contributions, be that dividends or PAYE.
All policies will have what's called a "deferred" period, which is the amount of time you need to be off work before the policy starts to pay out. The longer that period is, the lower the cost of the policy as it reduces the probability of you making a claim. Typically, when we speak to customers, we recommend making the deferred period as long as feasibly possible to keep premiums down. Of course, if you have little or no savings, then having a relatively short deferred period will be essential. Deferred periods can usually be set between 4 and 52 weeks, according to your requirements.
In terms of how long payments continue, you can decide this when you take out a policy. In some cases, people may look for short-term cover, say of only a few years; in others, they may take out cover right up until retirement. The choice is yours; obviously, it should go without saying that the longer the policy term, the higher your premiums will be, but with that, the more protection you're afforded.
Income protection policies will continue to pay out until one of the following happens:
- You return to work
- You reach the end of the policy term
- You pass away
Critical illness cover is a type of insurance usually taken out alongside a life insurance policy and covers you for a set list of conditions. If you're diagnosed with one of those illnesses, your critical illness policy will pay out a one-off lump sum, which is quite different to how income protection insurance works. So, critical illness cover will only insure you against a set list of severe conditions, and regardless of when or if you are fit enough to work again, you will receive the same payout.
First, income protection covers almost all illnesses and injuries, not just a prescribed list of the most serious. For example, whereas critical illness policies usually wouldn't pay out for severe back pain, if that back pain is preventing you from working, an income protection policy would. Second, where critical illness pays out a one-time lump sum, income protection will continue until you return to work or the policy's term ends. That means that it could keep paying until you retire if that's what you opt for when you take out cover. Generally speaking, income protection insurance will cover you for a lot more and for longer, and because of that, policies tend to be more pricey than Critical Illness Cover.
As we've explained, the way income protection works, be that a policy you pay for personally or via your business, is almost the same. Still, there are some subtle differences to be aware of and why it might be better for you to put it through the company as a business owner.
Personal income protection policies typically cover up to a maximum of 65% of your monthly gross (pre-tax) income, which can consist of both salary and dividends. Some insurers limit personal policies to just 50% of income, so it can be worth setting the amount of cover at this level to get the most competing quotes.
Business owner income protection, also known as Executive Income Protection (EIP), will usually allow you to cover up to 80% of gross earnings as well as your National Insurance contributions. In the event of a claim, the benefit paid by the insurer to your company is tax free and treated as a trading receipt, however, you will need to pay tax on the benefit when you take the funds out of the company as an income. The advantage of EIP is that the premiums can usually be put through the business as an allowable expense.
The advantage of taking out a policy via your business is that premiums can usually be put through the business as an allowable expense.
When you apply for business owner income protection, the insurer will ask you several medical questions, which it's vital to answer truthfully and accurately. The questions will focus mainly on your health in the past five years. If you have suffered a medical condition, your insurer will do one of the following once you disclose it to them:
- Cover the condition on standard terms
- Charge an additional premium to cover the condition
- Exclude the condition entirely
- Exclude the condition but offer a date at which it will consider reviewing the exclusion
When it comes to finding an income protection policy, you're spoilt for choice as a business owner. As we've mentioned, you can opt for either a personal policy or one via your business, but with so many to choose from, identifying the best fit for your circumstances can be a challenge, which is why we always recommend speaking to an independent adviser (like us).
Best personal income protection providers:
- AIG life
- Aviva
- British Friendly Society
- L&G
- Liverpool Victoria
- Nationwide
- Royal London
- Cirencester Friendly
- The Exeter
- Vitality
Best business income protection providers:
- Aegon
- Unum
- L&G
- LV=
What next?
With lots of policies and providers to choose from, not to mention the various options, you can be forgiven for thinking that it'll be a headache to get a policy set up. Fortunately, our team of expert Business Protection Insurance advisers are on-hand to help you select the right policy and best of all, the service we provide is free of charge! Get in touch and speak to an expert today.
Can a business pay for income protection?
Yes, a business can pay for the premiums of an Income Protection policy. However, there are several tax implications that you should consider before opting for this route.
Can you get income protection if you're self-employed?
Yes, you can take out income protection insurance if you're self-employed, and in fact, it's probably more critical for you than those who are employed and have company sick leave.
Can sole traders get income protection?
If you're a self-employed sole trader, you can get income protection insurance, but it will need to be a personal policy rather than one paid for by the business.
Can I have 2 income protection policies?
In theory, you could have more than one policy. Still, you would be typically limited to a combined maximum percentage of your income, so there's not usually a benefit of doing this.
How long is income protection paid out for?
The length of your policy term will dictate how long your insurer will pay out the benefit in the event of a claim - that and whether you're fit enough to return to work, of course.
