Executive Income Protection for Directors: How to Structure Cover Correctly

Structuring executive income protection for directors correctly starts with your company applying as the policy owner and premium payer, with you as the director named as the life assured. Insurable income is calculated from your salary and dividends together, up to 80% combined, with the option to include a non-working shareholder spouse under the same policy.

Key facts

• The company is the policy owner and premium payer; the director is the life assured.
• Insurable income is based on salary and dividends together, up to 80% of the combined figure.
• A working director and a non-working shareholder spouse can both be insured under the same policy.
• A sole director limited company can still take out cover, provided insurable income can be demonstrated.
• Directors often have more flexibility than employees to self-fund a short gap before a claim starts paying.
• Deferred period choice should reflect how long the business could sustain paying the director unaided.

Executive Income Protection for Directors: What Counts as Insurable Income?

Insurers calculate insurable income from your salary and dividends together, insuring up to around 80% of the combined figure, rather than treating dividends as a bolt-on to a salary-only calculation. This matters because many directors take a modest salary topped up with larger, regular dividends, and a policy built around salary alone would leave that income largely unprotected.

It's also possible to insure a working director and a non-working shareholder spouse under the same policy, reflecting how income is often genuinely shared between the two in a family-owned business.

What If My Income Is Mostly Dividends?

As a simple worked example: a director with a £30,000 salary and a further £40,000 in regular dividends has £70,000 in combined income, of which up to roughly £56,000 (80%) could be insured under executive income protection. Because dividends are included from the outset, a director paid mostly through dividends isn't left under-insured the way they would be on a policy built around salary alone.

How to Set Up Executive Income Protection Through Your Company

In practice, your company applies for the policy, is named as the policyholder, and pays the monthly premium. You, as the director, are named as the life assured, and you'll nominate a deferred period and benefit term as part of the application. For the eligibility basics before you apply, see what executive income protection is and who needs it.

Executive Income Protection for Directors: Sole Director Eligibility

A common assumption is that you need multiple employees to take out cover, in the way a group scheme does, but that's not the case for executive income protection. A single-director limited company can apply, provided the business can demonstrate the director's insurable income and pay the premium as a normal company expense.

Choosing the Right Deferred Period as a Director

This depends on how long the business could continue paying you an income before cover needs to start. Directors with cash reserves or a flexible approach to dividends often have more room to self-fund a short gap than an employee would, which can make a longer deferred period, and a lower premium, a sensible choice. For the tax mechanics that sit alongside this decision, see our tax treatment guide.

How Does Deferred Period Affect Premium Cost?

A longer deferred period generally means a lower premium, because the insurer only has to pay out for longer absences. Directors who can comfortably self-fund the first few weeks or months of an absence, whether from company cash reserves or flexible dividend timing, are often better placed to choose a longer deferred period and reduce ongoing cost.

In short: insurable income for a director is salary plus dividends (up to 80% combined), a sole director company is eligible provided insurable income can be shown, and the right deferred period depends on how long the business can self-fund an absence.

FAQs

Can a sole director get executive income protection?

Yes. A company with a single director can still take out executive income protection, provided the company can demonstrate the director's insurable income and pay the premiums as a business expense.

Does executive income protection cover dividend income?

Yes. Executive income protection is built around salary and dividends together, insuring up to around 80% of the combined figure, which is one of the main things that sets it apart from personal income protection.

What deferred period should a director choose?

This depends on how long the business could continue paying the director an income before cover needs to start. Directors with cash reserves or flexible dividend policies may opt for a longer deferred period to reduce premium cost.

Can a non-working spouse be insured alongside a director?

Yes. A working director and a non-working shareholder spouse can both be insured under the same executive income protection policy, reflecting how income is often genuinely shared in a family-owned business.

How is insurable income calculated for a director?

Insurable income is based on a director's salary and dividends added together, with up to around 80% of that combined figure available to insure, rather than salary being assessed on its own.

Setting up cover for your own company? Talk to us about setting up executive income protection for your company and we'll help you structure it correctly from the start.

Written by

Alex Ogden DipFA | Director | Executive Life

Alex Ogden DipFA holds the Level 4 Diploma for Financial Advisers (DipFA) awarded by the London Institute of Banking and Finance (LIBF). He is authorised by the FCA, Ref: AJO01072. View the FCA register entry.

This article is for general information only and does not constitute financial, tax or legal advice. Tax treatment depends on individual circumstances and may change in future. Executive Life is authorised and regulated by the Financial Conduct Authority. Speak to a qualified adviser before making any decisions based on this content.