TL;DR
WeCovr compares Zurich and Royal London's executive income protection for UK company directors, focusing on how these specialist policies can cover both salary and dividend income. Our expert analysis helps you find a suitable plan to protect your full earnings.
Key takeaways
- Executive Income Protection is a company-paid policy designed to replace a director's income if they cannot work due to illness or injury.
- Zurich and Royal London are leading providers offering policies that can cover both PAYE salary and dividend income, a key issue for directors.
- Premiums are typically a tax-deductible business expense, making it a highly tax-efficient way to arrange personal protection.
- Benefits are paid to the company and then distributed to the director via PAYE, subject to Income Tax and National Insurance.
- Choosing the right policy requires expert comparison of definitions, cover levels, and value-added services, which a specialist broker can provide.
Comparing executive sick pay policies that cover both salary and dividend income
For company directors in the UK, financial planning is a unique challenge. While you enjoy the autonomy and rewards of running your own business, you often lack the safety net of a traditional employee benefits package, particularly when it comes to long-term sick pay. This is where Executive Income Protection becomes an indispensable tool in your financial armoury.
The central problem for most directors is that their income is a mix of a modest PAYE salary and more substantial dividend payments. Standard income protection policies often fall short, covering only the salary component and leaving a significant portion of your earnings unprotected.
This article provides a definitive comparison of two of the UK's leading providers in this specialist area: Zurich and Royal London. We will explore how their Executive Income Protection policies are specifically designed to address the salary-and-dividend issue, offering a robust financial lifeline should you be unable to work due to illness or injury.
As FCA-regulated brokers, we at WeCovr specialise in navigating the complexities of business protection. This guide will provide you with the authoritative insight needed to understand these products, compare them effectively, and make an informed decision to secure your financial future.
What is Executive Income Protection?
Executive Income Protection is a type of insurance policy owned and paid for by your limited company. Its purpose is to provide a regular monthly income if you, as a key employee or director, are unable to work due to sickness or an accident.
Unlike a personal policy you pay for yourself, the business pays the premiums. If you make a valid claim, the insurer pays the benefit to the company. The company then uses these funds to continue paying you a salary, which is processed through PAYE.
Key characteristics include:
- Company-Owned: The policy is an asset of the business.
- Tax-Efficient Premiums: Premiums are generally treated as an allowable business expense, reducing the company's corporation tax bill.
- Benefit Paid to the Company: The insurer pays the claim funds to the business, not directly to the individual.
- Protects the Director: It ensures you can continue to receive an income, meeting personal financial commitments like your mortgage, bills, and family expenses.
- Protects the Business: It removes the financial and moral dilemma of whether the business can afford to keep paying a director who is not contributing.
The Director's Dilemma: Protecting Both Salary and Dividends
The primary reason directors need a specialist policy is tax efficiency. Most owner-directors structure their remuneration to be as tax-efficient as possible:
- A Low PAYE Salary: Typically set at or just above the National Insurance threshold to qualify for state benefits without incurring significant tax or NI contributions.
- Higher Dividend Payments: The remainder of their income is drawn from company profits as dividends, which are taxed at a lower rate than salary income.
This common structure creates a major gap for standard protection. A personal income protection policy will typically only cover a percentage (e.g., 60%) of your PAYE salary. If your salary is £12,570 per year, your cover would be limited to around £630 per month, a fraction of your true earnings.
This is where Executive Income Protection from providers like Zurich and Royal London excels. They have designed their policies with this specific scenario in mind, allowing you to insure a high percentage (often up to 80%) of your total remuneration – combining both your salary and your share of the company's dividends.
This ensures that the level of protection you receive accurately reflects your lifestyle and financial commitments, rather than being based on an artificially low salary figure.
Understanding the Tax Treatment of Executive Income Protection
The tax implications are a significant advantage of this type of policy. It's crucial to understand how both premiums and benefits are treated by HMRC.
- Premiums: The monthly premiums paid by the limited company for an Executive Income Protection policy are typically considered a legitimate business expense. This means they can be offset against the company's profits, reducing its overall corporation tax liability. For a company paying corporation tax at 25%, this represents a substantial saving.
- Benefits (The Payout): If a claim is made, the monthly benefit is paid directly to the company, tax-free. The company then uses these funds to pay the incapacitated director an ongoing salary. This payment to the director is processed through the company's payroll (PAYE) system. As such, the income received by the director is subject to their marginal rate of Income Tax and National Insurance Contributions, just like a regular salary.
Essentially, the company gets tax relief on the way in (premiums), and the individual pays tax on the way out (benefits). This is a logical and established framework accepted by HMRC.
Disclaimer: This is general guidance only and does not constitute formal tax or financial advice. Tax treatment depends on individual circumstances, policy terms, and HMRC interpretation, which cannot be guaranteed in advance. Whenever applicable, businesses and individuals should always consult a qualified accountant or tax adviser before arranging such policies.
Zurich Executive Income Protection: A Detailed Look
Zurich is a major global insurer with a strong presence in the UK protection market. Their Executive Income Protection plan is a popular choice for company directors due to its clarity and comprehensive cover.
How Zurich Defines and Covers Director's Income
Zurich's policy is specifically built to accommodate the salary-and-dividend model. They define earnings as the combination of:
- Gross PAYE Salary: Your annual salary before tax.
- Dividends: The dividends you receive from your shareholding in the company.
- P11D Benefits: The value of any benefits-in-kind, such as a company car or private medical insurance.
Zurich will typically look at your remuneration over the last 12-24 months to establish a sustainable level of income to insure. They offer to cover up to 80% of your total remuneration, up to a maximum of £250,000 per year (£20,833 per month).
Key Features of Zurich's Policy
| Feature | Details |
|---|---|
| Cover Level | Up to 80% of total earnings (salary + dividends + P11D benefits). |
| Maximum Benefit | £250,000 per year (£20,833 per month). |
| Deferred Periods | 4, 8, 13, 26, 52, or 104 weeks. This is the waiting period before the benefit starts. |
| Definition of Incapacity | 'Own Occupation' is available and strongly recommended. This means you can claim if you are unable to perform your specific job role. |
| Claim Payout Term | Can be a fixed term (e.g., 2 or 5 years) or a long-term plan that pays out until your chosen policy end age (e.g., 65 or 70). |
| Indexation (Inflation-Proofing) | Option to link your cover to the Retail Prices Index (RPI) so its value keeps pace with inflation. Premiums will also increase. |
| Value-Added Services | Access to Zurich Support Services, offering counselling, legal advice, and practical support for you and your family, available from day one. |
| Continuation Option | If you leave the company or wind it up, you may be able to convert the executive policy into a personal income protection policy without further medical underwriting. |
Real-Life Scenario: Zurich in Action
Meet Alex, a 45-year-old Director of a successful software consultancy.
- Remuneration: £12,570 PAYE salary + £87,430 in annual dividends. Total income: £100,000.
- Policy: Alex's company takes out a Zurich Executive Income Protection policy to cover 80% of his total income, providing a benefit of £80,000 per year (£6,667 per month). He chooses a 13-week deferred period.
- The Claim: Alex suffers a serious back injury in a cycling accident and requires surgery, followed by a long recovery period. He is unable to work for 9 months.
- The Payout: After the 13-week deferred period, Zurich starts paying £6,667 per month to Alex's company. The company processes this through payroll, paying Alex a net monthly income. This allows him to continue paying his mortgage and family bills without financial stress, focusing entirely on his recovery. The corporation tax relief on the premiums made the policy highly affordable for his business.
Who is Zurich's Policy a Good Fit For?
Zurich's Executive Income Protection is often a strong fit for established company directors with a consistent and well-documented history of salary and dividend payments. Their clear definition of earnings and high cover limits make them a reliable choice for high-earning professionals seeking robust and straightforward protection.
Royal London Executive Income Protection: A Detailed Look
Royal London is the UK's largest mutual life, pensions, and investment company. They are highly regarded for their customer-centric approach and flexible protection products. Their plan for directors is another market-leading option.
How Royal London Defines and Covers Director's Income
Royal London also explicitly caters for directors taking a mixture of salary and dividends. Their definition of earnings includes:
- Salary: Your gross PAYE salary.
- Dividends: Your share of dividends paid by the company.
- Director's Loan Account: In some circumstances, they may consider regular drawings from a director's loan account as part of the income calculation, subject to underwriting.
They will want to see evidence of earnings, typically via accounts or P60s/tax returns, to agree on the right level of cover. Royal London allows you to cover up to 80% of your total remuneration, with a generous maximum benefit of £280,000 per year (£23,333 per month).
Key Features of Royal London's Policy
| Feature | Details |
|---|---|
| Cover Level | Up to 80% of earnings (salary + dividends). |
| Maximum Benefit | £280,000 per year (£23,333 per month). |
| Deferred Periods | 4, 8, 13, 26, 52 weeks. |
| Definition of Incapacity | 'Own Occupation' definition is widely available, providing a high-quality basis for a claim. |
| Claim Payout Term | A choice of limited payment terms (1, 2, or 5 years) or full-term cover paying out until retirement age. |
| Indexation (Inflation-Proofing) | Cover can be increased annually in line with inflation to maintain its real-terms value. |
| Value-Added Services | Access to Helping Hand, a comprehensive support service offering second medical opinions, physiotherapy, mental health support, and nurse-led advice. |
| Proportionate Benefit | If you return to work on a part-time basis with reduced earnings, Royal London may pay a partial benefit to top up your income. |
Real-Life Scenario: Royal London in Action
Meet Chloe, a 38-year-old Creative Director and founder of a small branding agency.
- Remuneration: £10,000 PAYE salary + £60,000 in fluctuating annual dividends. Total average income: £70,000.
- Policy: Chloe's agency arranges a Royal London Executive Income Protection policy for a benefit of £56,000 per year (£4,667 per month), with a 26-week deferred period to align with her business's cash reserves.
- The Claim: Chloe is diagnosed with a serious illness that requires intensive treatment, leaving her unable to manage her business or clients.
- The Payout & Support: After 26 weeks, Royal London begins paying the benefit to her company, which continues to pay her a salary. Crucially, Chloe uses the 'Helping Hand' service. She gets a second medical opinion on her treatment plan and is connected with a dedicated nurse who provides guidance throughout her illness. This practical and emotional support proves just as valuable as the financial payout itself.
Who is Royal London's Policy a Good Fit For?
Royal London's policy is an excellent option for directors who value not just the financial payout, but also the extensive, hands-on support services that come with the plan. Their flexible approach to underwriting and features like the proportionate benefit can be particularly appealing to directors whose earnings might fluctuate or who want a safety net if they can only return to work part-time.
Zurich vs. Royal London: Head-to-Head Comparison
While both providers offer outstanding solutions, there are subtle differences that might make one a better fit for your specific circumstances. A specialist adviser can help you navigate these nuances, but here is a direct comparison of their key features.
| Feature | Zurich | Royal London | Adviser Insight |
|---|---|---|---|
| Definition of Income | Salary + Dividends + P11D Benefits | Salary + Dividends (and potentially Director's Loan Account) | Both are excellent for directors. Zurich's inclusion of P11D benefits is clear, while RL's potential flexibility on loans can be useful. |
| Maximum Annual Benefit | £250,000 | £280,000 | Royal London has a slightly higher maximum limit, which may be relevant for very high earners. |
| Longest Deferred Period | 104 weeks (2 years) | 52 weeks (1 year) | Zurich's 104-week option could lead to lower premiums for businesses with very strong cash reserves. |
| Definition of Incapacity | 'Own Occupation' available | 'Own Occupation' available | Both offer the gold-standard definition, which is crucial for directors in skilled or specialist roles. |
| Value-Added Service | Zurich Support Services (Counselling, legal advice) | Helping Hand (Nurse support, physiotherapy, second opinions) | Royal London's Helping Hand is often seen as more hands-on and health-focused, whereas Zurich's is a broader wellbeing and practical support package. |
| Continuation Option | Yes, option to convert to a personal policy. | Yes, option to convert to a personal policy. | A vital feature offered by both, providing long-term flexibility if your business circumstances change. |
| Proportionate Benefit | Not as a standard feature. | Yes, a key feature to support a phased return to work. | Royal London's proportionate benefit is a significant advantage, offering financial support during a gradual recovery. |
Which is a Better Fit for You?
Choosing between Zurich and Royal London isn't about which is "best" overall, but which is a more suitable option for your business and your needs.
- Consider Zurich if: You are a high earner with a very stable income history, value a straightforward and robust policy, and your business has enough cash reserves to potentially opt for a very long deferred period (104 weeks) to reduce premiums.
- Consider Royal London if: You place a high value on integrated health and wellbeing support during a claim, you anticipate a phased return to work might be necessary (making their proportionate benefit very attractive), or you are one of the UK's highest earners needing the top-tier benefit limit.
Ultimately, the most effective way to decide is to get like-for-like quotes and discuss the policy wording with an expert. At WeCovr, we provide this comparison service, analysing the small print and advising on the optimal structure for your specific directorship.
Other Essential Protection for Company Directors
Executive Income Protection is the foundation of your personal financial security, but a comprehensive business protection strategy should also include other elements.
Key Person Insurance
What would happen to your business's profitability if you or another crucial individual were unable to work long-term? Key Person Insurance is designed to protect the business itself.
- What it is: A life insurance and/or critical illness policy taken out by the company on a 'key person'.
- How it works: If that person dies or is diagnosed with a specified critical illness, the policy pays a lump sum to the company.
- What it's for: The funds can be used to recruit a replacement, cover lost profits, or repay business loans, ensuring the business can survive the loss of its most valuable asset.
Shareholder Protection Insurance
For companies with multiple directors/shareholders, this is vital for smooth succession.
- What it is: A policy taken out by each shareholder on the lives of the others, usually combined with a legal agreement.
- How it works: If a shareholder dies, the policy pays out to the surviving shareholders.
- What it's for: This provides them with the capital to purchase the deceased's shares from their estate. This ensures the remaining owners retain control of the business and the deceased's family receives fair value for their shares.
Relevant Life Cover
This is a tax-efficient alternative to a 'death in service' benefit often found in larger corporations.
- What it is: A company-paid life insurance policy for an individual director or employee.
- How it works: It pays a tax-free lump sum to the individual's family or dependants if they die during the policy term.
- Why it's tax-efficient: Premiums are usually a tax-deductible business expense, and it is not treated as a P11D benefit for the employee. It's a highly effective way for small companies to provide valuable life cover for their directors.
How WeCovr Makes Complex Decisions Simple
Navigating the world of executive and business protection can be complex. The definitions, tax rules, and product features require specialist knowledge to get right. This is where using an independent, FCA-regulated broker like WeCovr adds immense value.
Here’s how we help:
- Whole-of-Market Comparison: We don't just look at Zurich and Royal London. We compare policies from all the UK's leading insurers to find the most suitable and cost-effective solution for you.
- Expertise in Director Remuneration: We understand the salary/dividend structure and work with underwriters to ensure your total income is properly evidenced and covered.
- Hassle-Free Application: We manage the entire application process, from form-filling to liaising with the insurer, saving you valuable time.
- No-Obligation Advice: Our service is provided at no extra cost. We receive a commission from the insurer if you proceed, so you get expert advice without the fees.
- Holistic Review: We can assess all your business protection needs, from Executive Income Protection to Key Person and Shareholder cover, ensuring you have a cohesive strategy.
As part of our commitment to our clients' long-term wellbeing, all WeCovr customers also receive complimentary access to CalorieHero, our AI-powered calorie and nutrition tracking app, helping you stay on top of your health.
Protecting your income is one of the most important financial decisions you will make as a company director. Let us help you do it right.
Frequently Asked Questions
Can't I just cover dividends with my personal income protection policy?
Generally, no. Most personal income protection policies in the UK are designed to cover PAYE salary only. They will not typically include dividend income in their calculation of your earnings. This is why a specialist Executive Income Protection policy is essential for company directors who want to protect their full remuneration package.
What happens to my executive income protection if I sell my company?
Both Zurich and Royal London include a 'Continuation Option' in their policies. This valuable feature allows you to convert the company-owned executive policy into a personal income protection policy in your own name if you leave or sell the business. This is usually done without the need for further medical underwriting, ensuring you can maintain your cover seamlessly.
Is the benefit paid by an executive income protection policy taxable?
Yes. The benefit is paid by the insurer to your limited company. The company then pays it to you, the director, through its payroll (PAYE). This income is treated like a salary and is therefore subject to your usual rate of Income Tax and National Insurance Contributions. The premiums, however, are normally a tax-deductible expense for the company.
Do I need a medical examination to get executive income protection?
Not always. For many people, cover can be arranged based on the answers you provide on the application form. However, for higher levels of cover, older applicants, or if you have pre-existing medical conditions, the insurer may request more information. This could include a report from your GP, a nurse screening, or a full medical examination, which they will arrange and pay for.
Get Your Tailored Comparison Today
Your ability to earn an income is your most valuable asset. As a company director, you have worked hard to build your business and your lifestyle; it's vital to protect it against the unexpected.
Both Zurich and Royal London offer first-class solutions, but the best policy is the one that is precisely aligned with your financial structure, your business, and your priorities.
Contact WeCovr today for a free, no-obligation quote. Our expert advisers will compare the market for you, explain your options in plain English, and help you secure the robust protection you and your family deserve.
Sources
- Financial Conduct Authority (FCA)
- Association of British Insurers (ABI)
- GOV.UK
- Office for National Statistics (ONS)
- NHS
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