An Executive Income Protection (EIP) is an important, tax-efficient employee-benefit for business owners and for their employees considered to be essential to the success of their business.
EIP is particularly relevant and important for directors and key employees who have little or no sick-pay entitlement, should they become too ill or injured to work. Furthermore, EIP’s are often arranged for businesses that want to provide an individual employee with income protection as an Employee Benefit.
An EIP policy is owned by the employer but is underwritten on the life of a shareholding director or an employee. If that insured employee is unable to work because of illness or injury, the EIP policy will pay a monthly benefit to the employer, which is then paid to the insured employee.
Under an EIP, gross taxable earned income, employer pension contributions and National Insurance (NI) contributions can all be insured.
What is gross taxable earned income?
This is income that will be lost in the event of incapacity and a range of flexible cover and benefit payment options enable you (the employer) to arrange EIP cover to meet the needs of your business as well as your insured employee.
It could include:
Bonuses/overtime (as long as the insured employee can prove that this has formed part of their normal salary over the last three years)
P11D benefits which could be lost in the event of incapacity
Income for a shareholding company director of their own business is the salary and dividends received from the profit generated, after deduction of corporation tax in the 12 months before a claim.
How does it work?
You (the employer) will choose when you want income payments to start and then for how long you want the income payments to be paid. At the start of the policy, you will choose a deferred period of 4, 8, 13, 26 or 52 weeks before the monthly benefit amount will commence. You will also choose the payment term; often, an EIP will offer you a choice of a 2-year, 5-year or full term benefit payment period.
If, for example, you choose the 2-year benefit payment period, the monthly benefit amount will be paid for a maximum of two years. Payment will start at the end of the chosen deferred period and will end on the 24th month (earlier, if fit to return to work). Then the insured employee will need to return to work for a period of six months before you (the employer) can claim again for that employee.
If you choose the full term benefit payment period, the monthly benefit amount will be paid for as long as the insured employee meets the definition of incapacity that applies to the policy or until the policy ends.
The EIP policy conditions will provide full details of the cover.
What’s the maximum benefit amount?
The maximum benefit calculation is:
80% of the insured employee’s pre-incapacity taxable earned income, up to a maximum of £150,000 a year, plus
The yearly contribution towards the insured employee’s pension made in the previous 12 months by the company, plus
Employer NI contributions, up to the amount paid for the insured employee in the last 12 months.
The combined overall limit for pension and NI contributions is £30,000. The total benefit amount available is £160,000 a year.
What are the age limits?
Age at entry: 18 to 59 years old
Term: 5 to 51 years
Maximum age at benefit expiry: 70 years old
How long will EIP be paid?
The monthly benefit amount will be paid until the earliest of:
The end of the benefit term for full-term EIP
The end of the benefit payment period for 2-year EIP;
The insured employee no longer meets the definition of incapacity that applies to the policy;
The insured employee stops suffering a loss of earnings;
The insured employee’s employment with the company ends, or
The insured employee dies.
What happens if the company stops trading?
If a valid claim is not being paid at the time, the EIP cover will end.
If a valid claim is being paid, it will to be paid until it stops due to one of the above circumstances. In this scenario, the meaning of income will be restricted to no longer include pension or NI contributions.
Why choose Executive Income Protection?
It can help small and medium-sized businesses attract and retain key talent
Such businesses don’t have the scale to qualify for group risk schemes, but a competitive employee benefits package could help you attract and retain the right employee base.
We can design a unique employee benefits packages for you.
Your policy premiums will normally be allowed as a business expense if they meet the ‘wholly and exclusively’ for the purposes of the business test.
As you (the employer) own the EIP policy, the policy payments aren’t treated as a benefit in kind for the insured employee. When a claim is being paid to the business, you can then pay your insured employee via PAYE, as relevant UK earnings.
Rehabilitation benefit and proportionate benefit
A reduced benefit amount could be paid to you (the employer) if the insured employee is no longer able to carry out their normal occupation but is able to return to work with fewer duties or working less hours, or can take up different work within your company at a lower income.
Helps employees to continue saving for retirement
As an EIP covers employer’s regular pension contributions, you can continue contributing to the insured employee’s pension. This means, as well as providing pre-retirement cover for your insured employee, the latter individual can also continue saving towards their retirement goals.
Waiver of premium
Waiver of premium benefit is automatically included, which means no premiums are payable while benefits are being paid.
Additional benefits at no additional cost
Both you (the employer) and the insured employee will have access to a second medical opinion service, 24/7 health and wellbeing service, and a key person replacement service throughout the term of the policy, at no extra cost (full information will be provided). This information is based on our understanding of current taxation law and HMRC practice, which may change.
Case Study - Executive Income Protection
INCOME PROTECTION INSURANCE
For an in-depth overview of income protection insurance, download our free guide
FREE DISCOUNTED QUOTE
Visit our quote page for an instant, discounted quotation
GET IN TOUCH
If you want impartial and independent advice about how income insurance protection could help you, contact us to learn more.