Firstly, what is income protection?
Income Protection Insurance, also known as IP insurance, supports you financially if you’re unable to work because of illness or injury.
What does income protection insurance cover?
Income Protection Insurance covers most illnesses and injuries that stop you working either in the short or long term – however, it doesn’t pay if you’re made redundant. Here’s how the policies usually work:
- Injured and are unable to work, though benefits from this cover may affect means tested benefits and it may also take into account other income you may receive and thus reduce the level of cover.
- Income protection covers you until you have recovered or until retirement, death, your policy ends or until the limited claim period on your policy ends – whichever is sooner.
- You can claim as many times as you need to – while the policy lasts.
Here are some things to consider before taking out a policy:
- What would happen if you got ill and couldn’t afford to pay the bills?
- If you’re employed, do you have sick pay to fall back on – and how long is this paid for? This may only be Statutory Sick Pay which is just £99.35 per week.
- If you’re self-employed, what would you do if you couldn’t work if you were ill or injured?
- Can you afford the level of cover you’ll need? You need to set premiums at an affordable level, but also make sure the policy will cover your bills if you do make a claim.
Can income protection be paid by the company? Yes, but there is more than one option.
When taking out an Income Protection policy there are two options to choose from.
1 – A personal income protection plan
This type of plan is paid from your personal income, so after you have paid tax and national insurance. You can insure up to 60% of your income and upon a successful claim the payments will be made tax free. A claim payment from a personal plan is not classed as UK relevant earnings, limiting the yearly amount you can put into a pension to £3,600 gross. This means that if you are off long term, you may not be able to build up the money you need to live in retirement. However, having income protection is better than not.
2 – An executive income protection plan
This plan pays a monthly benefit to the business when an employee is absent because they’re unwell or injured. The monthly benefit the business receives in the event of a valid claim, can be used to help fund the employee’s ongoing sick pay. You can cover up to 80% of your income, but this will be taxable, as the income is paid to the business and then yourself via PAYE. However, with this type of plan you can also insure your pension contributions and employer national insurance, so that you can continue to make pension contributions, so your retirement stays on track.
HMRC usually allows premiums for Executive Income Protection to be treated as an allowable business expense, with corporation tax relief available and no additional income tax or National Insurance to pay. Please check this with your accountant.
You are always best to seek advice before taking out one of these policies. So, please contact us using our Contact Us or Facebook page if you need help, or call the office on 01329 282882.
Income Protection plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse. Cover is subject to terms and condition and may have exclusions.
All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs’ practice. Levels and bases of tax relief are subject to change.