What is executive income protection and who offers it?
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I find the disparity in pricing between personal and business totally unjustified and have not managed to put in place a single Executive IP plan yet?
Hi David,
There is actually no pricing differential between individual and Executive IP with Legal & General (and I believe Aegon as well). So on a like for like quote, the premium from both insurers would be identical on their personal and Exec products. Obviously if the benefit is increased on the Exec, to account for tax deductions, that will push the price up. The actual cost to the policy holder should be less as well, as the plan could qualify for tax relief.
UNUM are slightly different because they don’t offer individual cover and the pricing for their Exec plan is very different.
How long in reality does the LTD company have to be trading in order to successfully instruct a policy? Single company directors when starting a LTD company may take very little in the way of income in the first months/year of becoming established….which makes me think the business (employee/director) is paying an individual a ‘typical’ monthly salary for a period of time before being possible to even create a policy…or am I completely wrong..
real benefit of executive income protection is they can cover the employer national insurance plus pension contributions and claim has a business expense . useful for a director and in case of sickness covering outgoings which would otherwise have to be taken from the profits of the company
Tax Treatment of Premiums
Is it not the case that tax relief on premiums paid by the employer in respect of any employee who has a proprietorial interest in the company will not normally be available.
L&G’s Executive Income Protection Technical Guide states; ‘if the employee doesn’t have a financial interest in the business and premiums are expended ‘wholly and exclusively’ for the purposes of the business, premiums should qualify as a business expense.
Payment of Benefit
“…In this case the company receives the claim payment from the insurer and must pass it on to the employee/director, as a PAYE salary and dividends (if applicable).
The claim payments are treated as a trading receipt for the company and tax is levied when the benefit is paid to the life-insured, through their salary and any dividend payments. Where the individual is the business owning director & shareholder they may chose to draw any claim payment from the business in a more tax efficient manner, by paying themselves a nominal salary and the remainder in dividends”
The supposed ability for shareholder/directors and their accountants to determine the most tax efficient remuneration structure as referred to above, does not appear to be supported in practise by providers from the point of claim. When I recently sought clarification of this I received the following responses:
Aegon – The income cover is also set up to be paid direct to the employer who would then remit it to the employee via the PAYE system.
L&G – The accounts would be expected to show that the clients were being paid the benefits as income and attracting PAYE taxation, not paid as dividends.
Aegon – We pay the claim proceeds direct to the employer to pay to the insured person via PAYE..
This stance appears to be supported by the HMRC’s tax manuals EIM 06410 Sections 62 and 221 ITEPA 2003 which only refer to employment income and earnings not dividends!
Section 221 ITEPA 2003
The part of the sick pay funded by the employer is taxable as employment income (see EIM06410).
Sections 62 and 221 ITEPA 2003
The employer may provide the funds for sick pay directly or through a trust or insurance policy. Whichever method is used, the sums paid to employees are taxable as earnings within Section 62 or Section 221 ITEPA 2003.
If the employer enters into an arrangement to insure any costs arising from his liability to provide sick-pay this is merely a funding arrangement. Money flows from the insurer to the employer who then pays out sums to the employee as sick pay. Sick pay received by the employee in these circumstances falls within the definition of “earnings” provided by Section 62 ITEPA.