Income protection (PHI) for limited company owners

income protection phi

As a contractor or other type of small company owner, you only get paid when you work. If you’re unable to work because of illness, it can put a strain on finances and while you may be able to bridge the gap with savings, this isn’t a long-term solution.

This is where a permanent health insurance policy (also referred to as income protection) can give you the support – and security – you need, when you need it most.

This type of policy will provide you with a pre-agreed monthly income that can help to cover expenses until you are well enough to return to work and start earning again. When it comes to insurance, there are always clauses and caveats to what is and isn’t covered and the old adage of shopping around for the best deal certainly applies.

Here we look at how permanent health insurance (PHI) works in practice and the level of cover you can expect.

PHI in a nutshell

PHI cover can be arranged to pay you a fixed monthly sum if you’re off sick or suffer a long-term illness. The policy can be put in place to cover you up to the point you retire, although you may decide you only need cover until you have paid off a mortgage, for example, or until your children are no longer dependent on you.

The amount of benefit you receive will depend on your average contract income and the length of time before the policy is activated, known as the ‘deferred period’.

This can be from day one, a month, six months or as long as a year from the time you are off sick.

Usually, the longer deferred period you select, the less you’ll pay for the policy but you’ll need to be sure you have the funds to cover you for the intervening weeks or months.

If you don’t have any funds to fall back on, a shorter deferred period is likely to be your best option.

How to pay for Income Protection

Most providers will insure you for up to 80% of your ‘gross earnings’ if the premiums are paid through your limited company; if you buy PHI with your personal, post-tax income, you can usually arrange cover for up to 55% of your earnings.

Paying for PHI via your limited company means you’ll be able to claim for it as an allowable business expense, making it tax-deductible although you will still have to pay tax on any payments received from the policy.

What to look for in a PHI provider

  • You should always look for a reputable provider who is experienced in dealing with small business owners and understands how contractors operate. Ask your accountant or financial adviser for help, especially with the kinds of exclusions to look out for.
  • Make sure the policy is on an ‘own occupation’ basis and clearly states that you will receive monthly payments if you’re unable to perform your usual work as a contractor. Unless this is specified, some providers will try and claim you could carry out some other type of work from your contract work and refuse to pay out.
  • Check the policy covers you for the period you want, for example, until you retire.
  • Look for a provider who understand how professional contractors / small business owners operate and is prepared to be more flexible, making changes to your policy as your circumstances change.
  • Ensure your PHI is inflation-proofed.
  • If you pay yourself a modest to low salary and take the balance in dividends – as many company owners do – check that your policy takes this into account. Some providers view dividends as investment income and pay out significantly less on any loss of earnings claims you make in future.

Are there any drawbacks to PHI?

As with any form of insurance, you should expect to answer a series of eligibility questions and may be required to undergo medical checks before a plan is issued.

You may be asked about any previous illnesses or inability to work caused by a medical condition. If you’ve had time off due to stress or suffer from a bad back, for instance, this could impact on the level of cover you are offered.

PHI is designed to cover loss of income due to illness only and will not pay out if you stop earning because a contract being cancelled.

You can insure against loss of earnings for reasons other than illness but this will mean paying an additional or higher premium.

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