Your salary, protected. Through your business.

The problem it solves

If you are a company director, you are generally not entitled to the sick pay an employee receives. There is no HR department quietly continuing your salary. If you stop working, the money stops, and the business usually keeps spending while you are away.

Statutory Sick Pay exists, but nobody runs a household on it. Not one household, anywhere, ever.

So the question is a simple one. If you could not work for six months, where would your income come from? Savings, usually, and then the business, and then it gets uncomfortable.

Income protection answers that question. Executive income protection answers it with the company paying the bill rather than you paying it out of money you have already drawn and paid tax on.

How it works in practice

The company takes out the policy on the director or employee, and pays the premiums.

If a valid claim is made, the insurer pays the benefit to the company. The company then pays it to the employee through payroll in the usual way, with tax and National Insurance deducted as they would be on salary.

That is the main structural difference from a personal policy, where the benefit is paid to you and, under current rules, is generally paid without tax deducted. The two routes arrive at a similar place by different roads, and the numbers behind them depend on how you draw income and what your company's position is. That is the conversation to have with your accountant before anything is set up.

What can be covered

Salary and dividends. For directors paying themselves a small salary and taking dividends, some insurers will take both into account when working out the benefit. Not all of them will, which is why the choice of insurer matters.

Bonuses and P11D benefits. A car, private medical cover and similar benefits can often be included.

Employer pension contributions. Some policies can cover these as well, so retirement saving does not stop during a claim.

National Insurance. Where the company continues to carry employer's NI on the benefit, that can sometimes be covered too.

The decisions that actually change the policy

Most of the real work is in four choices, and they matter more than the headline premium.

How long before it pays out. The deferred period is the gap between stopping work and the benefit starting, often four, thirteen, twenty-six or fifty-two weeks. A longer wait generally costs less, so the question is how long the business and the household could cope unaided.

How long it pays for. Some policies pay for a set period, often one, two or five years. Others pay until you recover, retire or the policy ends. Short-term cover costs less and does less.

How "unable to work" is defined. This is the one people skip, and the one they ring me about later. An own-occupation definition considers whether you can do your own job. Other definitions ask whether you could do any job you are suited to, which is a much harder test to meet.

Whether the benefit keeps pace. Cover can stay level or increase over time. Without it, a long claim loses value as prices rise.

I will go through each of these with you rather than handing you a quote and hoping for the best.

Executive or personal cover?

There is no universal answer, and anyone who gives you one without looking at your accounts is guessing.

Company-paid cover often suits directors who draw income through a business and whose company can meet the premiums. Personal cover can suit where income is drawn in other ways, where the business is young, or where the person wants the policy to stay with them regardless of what happens to the company.

The things that decide it are how you pay yourself, how your company's finances look, how long you expect to be with that business, and what your accountant advises about the tax treatment of both. It is worth an hour to get right, because it is a policy you may hold for twenty years.

If personal cover is the likelier fit, income protection covers how that works.

Where it sits alongside your other cover

Executive income protection covers your income while you are alive and unable to work. It does not pay out on death, and it is not the same as cover protecting the business itself.

• Relevant life plans are company-paid life cover for a director or employee, paid to the family.
• Key person insurance pays the business if someone central to it dies or becomes critically ill.
• Shareholder protection funds the remaining owners to buy a departing shareholder's stake.

Plenty of directors need more than one of these, and plenty need fewer than they have been sold. The business protection page is the overview if you want to see how they fit together.