The prospect of being unable to work for the long term due to accident or sickness is often the worst nightmare for many company directors or key employees, whom very livelihood is dependent upon their knowledge and expertise to generate a regular source of income.
Unfortunately, the Association of British Insurers (ABI) estimates that 1 million workers a year find themselves in this situation. With Statutory Sick Pay for an employee (or director) being £96.35 per week for 28 weeks, the question must be asked, how would you maintain your current lifestyle and how would you continue to plan for the future?
According to The Office for National Statistics (ONS, in March 2021), the average family household spends £585.60 per week. Whilst you may have some savings, these may not last long creating undue financial strains and pressures which can often compound an already difficult situation. Based on a savings pot of £10,000, this would be completely exhausted within 4/5 months.
By seeking advice and arranging suitable, tailored protection can ensure that some form of normality, at least financially, can continue should you be unable to work for the long term due to accident or sickness.
For larger firms, you may already get this benefit in the form of a ‘group income protection’ arrangement. The business would benefit from having reduced costs for this cover due to the large number of people insured and the premium would be classed as a business expense.
However, for smaller firms, this may not prove to be the most cost-effective means of providing cover. It may, therefore, be prudent to consider alternative options, one of which is ‘executive income protection’. This type of benefit is primarily for key employees or directors and like with the group arrangement, the premiums would be classed as a business expense. In addition to this, there may be other tax advantages in comparison to owning the policy personally.
The following example illustrates how the cost savings may apply in comparison to a personal arrangement. Please note you should always seek professional advice whilst reviewing your protection arrangements due to the tax treatment of benefits once in payment.
Based on a monthly premium of £50 for a higher rate taxpayer funding the premiums from his/her net pay (once National Insurance at 2% and income tax at 40% are deducted) this equates to a total gross monthly outlay of £79.46. A similar plan funded by the employer via an executive income protection arrangement (after Corporation Tax relief) would cost £40.50 per month, thus saving £38.96 or 49%.
Executive income protection arrangements allow you to cover up to 80% of your earnings, however, in payment the benefit would be taxable at your marginal rate of income tax at the time of claim. You can also choose a level of cover up to include P11D benefits and, potentially, any dividends paid where this is directly linked to performance within the business. Comparably, personal income protection will typically only cover 55-65% of your earnings, but this benefit would be paid tax-free upon a successful claim, meaning that the difference in benefit net of tax may be negligible.
To check that you are adequately protected or impartial, independent advice get in touch. Armstrong Watson Financial Planning can provide bespoke, specialist protection advice. As our Protection Advice Consultant, Hayley can discuss and advise on all aspects of your personal and business protection requirements based on your individual circumstances.
