Protecting the most important part of your business
Running your own business is hard. Whatever it might be, you are constantly making sure that you are earning enough to not only pay for all your overheads but to also pay yourself a decent salary, otherwise what is the point?
The problem is that you are sometimes so focused in the areas that you know best and making sure that your business, contents, vehicles and other tangible assets are insured adequately in the event of fire, theft, accidental damage or anything else that may interrupt the smooth running of your company that you forget about protecting the most important part of your business – you and your key employees in the event of incapacity.
This is where Executive Income Protection comes into its own.
Simply put, it insures the earnings, dividends and P11D benefits of an employee. It can also cover the employer pension and NI contributions of any employees you choose to protect which would also include yourself as an employee/business owner. In the event of a valid claim, your business would receive a monthly benefit which can then be used to fund the employee’s ongoing sick pay if they are unable to work as a result of becoming incapacitated due to illness or injury. This can help the employee to meet their financial commitments whilst not leaving them to rely solely on their savings or state benefits.
How does it work?
You, as the employer, would choose the benefit term, when you would want the income payments to start and for how long. There are, normally, different deferral periods to choose from which the provider would start paying the monthly benefit amount if the employee was unable to work due to sickness or disability.
There are two types of definitions for incapacity:
- Own Occupation
- Activities of daily work
The provider would decide which definition the employee would come under depending on the type of work they were involved in. Own occupation is the better of the two meaning that if the employee could not perform his actual duties that he was trained for the benefit would start paying out, after the relevant deferred period. For activities of daily work the insured person would not be able to perform, normally 3 out of a list of 6, work activities before qualifying for the benefit.
What is the maximum benefit amount?
Most providers offering this protection will insure around 75% to 80% of the employee’s earnings, including dividends, up to a maximum amount which would differ depending on the insurance company recommended. They would also insure, on top of this amount, the yearly contribution towards the employee’s, or insured person’s, pension made in the previous 12 months by the employer plus employer NI contributions, up to the amount paid for the employee in the last 12 months. However, there would be a limit to the total pension and NI contributions amount that would be covered.
The income, pension and NI contributions would be paid by the executive income protection, if necessary, until either the end of the term or until the employee recovers and starts earning again, the employment ends or the employee dies.
Not only does this type of protection insure a generous proportion of the employee’s income, pension and NI contributions, it can also be used to attract and retain key talent.
The premiums, or cost of the plan, are paid by your business and as such would normally be allowed as a business expense.
As you, as the employer, owns the policy the premiums are not treated as a benefit in kind for the employee being covered. When the claim is paid to you (the employer) you can then pay this to the employee via PAYE as relevant UK earnings. This is obviously based on current understanding of taxation law and HMRC practice, which may change.
As executive income protection covers employer’s regular pension contributions you, as the employer, can continue contributing into your employee’s pension. This means that as well as providing pre-retirement cover for your employees, they can also continue saving towards their retirement goals.
If you would like to know in more detail how executive income protection could become a life saver to your business and you would like to know more about how it could benefit you then please do not hesitate to contact John Velasco on 01329 282882, or by using our Facebook or Contact Us page.
This is subject to the policy terms and condition and any predetermined limitations of the plan. The plan benefits vary between product providers. These plans typically have no cash in value at any time and cover will cease at the end of term. If premiums stop, then cover will lapse.