Personal finance

Executive Income Protection for Freelancers and Contractors

Ill freelancer

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    As a contractor, you may review your finances fairly often and look at your current and projected earnings to enable you to set effective budgets, for you personally and for your business moving forward. This allows you to set future personal and financial goals, which could centre on retiring early to planning that big holiday away with your family.

    These plans and your current lifestyle are supported by you continuing to work and generating a regular income. But what happens if you’re unable to work due to illness? Your level of income may well fall and your financial plans for the future may be compromised.

    Executive Income Protection – A tax-efficient tax efficient way of protecting your income

    Although being off work for a prolonged period of time may not currently seem likely, the Department for Work and Pensions (DWP) calculates that approximately two million people in the UK are currently claiming incapacity benefits.

    Some people may choose to use their savings in the event of illness to cover themselves for a short period of time, but what happens if you are still off work after one month, six months or even a couple of years?

    This is where an executive income replacement plan can be used to protect you and your family. The plan will pay regular monthly amounts once you have been unable to work for a predetermined amount of time.

    What benefits can an Executive Income Plan provide?

    • Cover can go up to age 75 in most cases
    • A maximum initial benefit of £300K per annum may be available
    • The maximum cover available will be up to 80% of gross earnings
    • Gross Earnings comprise the average of your salary and dividends paid in the last three years
    • A range of deferment periods from one month to 12 months*
    • Guaranteed premiums that don’t change
    • Level cover option or Indexed cover (at RPI or 5%) – to protect your income against the effects of inflation
    • It can also cover other costs to the company such as employer National Insurance contributions payable in the event of incapacity and the cost of some or all of the employer pension/life assurance premiums.

    The deferment period is how long you have to be ill before the policy pays out; the longer the period the cheaper the policy.

    How does the plan work for a limited company?

    The policy will be set up in the name of the limited company and the premium will also be paid by the company. This premium will normally be classed as a tax-deductible expense for the business and as such, a claim for Corporation Tax relief on the premium may be made. When a valid claim is made, the benefit would be payable to the company and it would be up to the company to then pass on a portion or all of the benefit to the contractor. When benefits are paid they may be taxed as a trading receipt.

    Are there any other reasons that I should be looking at this sort of protection?

    Many banks are now asking for a relevant income protection plan to be in place prior to the instigation of any business loan. This style of plan has been used for, and continues to be used for this purpose.

    This particular style of insurance is aimed predominately at limited companies with a small number of people seeking cover. There is no investment element and therefore no surrender value to the policy.

    In short:

    • Executive cover is written on an individual basis but premiums are paid by your limited company – which owns the policy.
    • Extremely tax-efficient tax efficient form of cover, making the plan an attractive alternative to a traditional income protection plan.
    • Dividends are covered by the plan, as well as salary – relevant to earnings.
    • Premiums can be offset against corporation tax, although benefits will then be taxed as a trading receipt.
    • Cover can also be arranged to cover the cost of employer NI contributions and any life or pension contributions that the employer would pay as part of the employee’s package during their absence.
    • Insure up to 80% of gross earnings (compared to typically 55% for personal income protection).
    • The benefit is paid tax-free to the business. The business can then pay the employee the benefit in the form of salary or dividends.

    Talk to the experts

    We’ve partnered with Seico to offer advice on all types of Life Cover including Executive Income Protection. You can call them on 0330 335 3399 and they’ll be able to offer individual advice on the best type of cover for you.

    Find out more about our Life Cover