Executive Income Protection: Company-Funded IP for Senior Employees

Most senior executives and directors understand the need for income protection in principle — but fewer are aware that their employer can fund that protection tax-efficiently through an Executive Income Protection (EIP) policy. EIP removes the need for the individual to fund protection from personal net income, can provide higher benefit limits than individual policies, and supports the company's duty of care to its most valuable employees.

This guide explains how EIP works, the tax treatment for employer and employee, the practical differences from individual income protection, and the key considerations for companies with internationally mobile staff.

What Is Executive Income Protection?

Executive Income Protection — sometimes called Group Income Protection for senior employees — is a group insurance policy taken out by an employer to protect its employees against long-term incapacity. If a covered employee is unable to work due to illness or injury beyond the policy's deferred period, the insurer pays a monthly benefit to the employer, who then continues to pay the employee as if they were still at work.

The arrangement benefits both parties:

The employer receives a tax-deductible business expense (the premium), can retain valuable employees during long illness, and fulfils its duty of care obligation. A company that demonstrates it has protected its key people is more attractive to senior recruits.

The employee receives continued income during a period when they are unable to work — without having to fund the insurance themselves and without being constrained by the lower benefit limits that apply to individual IP policies.

Tax Treatment in Detail

The tax treatment of EIP is a core reason for its attractiveness as a business benefit:

Employer's premiums. Premiums paid by the employer are treated as a deductible business expense for corporation tax purposes — similar to the treatment of wages. There is no P11D benefit-in-kind reporting requirement for the premium (unlike private medical insurance).

Claim benefit received by the employer. When a claim is paid, the insurer pays the benefit to the employer. This payment is treated as taxable income for the employer — it offsets the salary cost the employer is continuing to pay. The company effectively receives back what it is paying out, with the insurance cost (the premium) being the net deductible expense.

Salary paid to the incapacitated employee. The employer continues to pay the employee their salary from the insurance proceeds. This payment is treated as ordinary employment income — subject to income tax and National Insurance in the normal way. The employee receives income protection that is taxed like salary.

The practical effect: the employee receives ongoing income during incapacity; the company's net cost is the insurance premium (a small fraction of the salary); and both parties benefit from a tax-efficient arrangement.

Benefit Limits: Why EIP Allows More Than Individual IP

Individual income protection policies typically limit the benefit to around 60% of gross earnings. This restriction exists to maintain the "moral hazard" principle — the idea that people should always have a financial incentive to return to work rather than subsist on insurance indefinitely.

Under a group employer scheme, the same moral hazard principle applies — but the calculation is different. Because the benefit from EIP is subject to income tax and National Insurance, the insurer allows a higher gross benefit (up to around 80% of gross earnings) knowing that the net benefit received by the employee will be at a similar level to the individual IP net benefit of 60% gross (which is paid tax-free).

This means that for a senior executive earning £200,000 per year:

• An individual IP policy might provide up to £120,000 per year (60% gross), paid tax-free
• An EIP policy might provide up to £160,000 per year (80% gross), taxed as income, resulting in a similar net income

Both achieve roughly equivalent financial protection for the employee — but the EIP route allows a higher gross benefit, which can be valuable where the executive's total remuneration (including bonus or commission) is high.

Additionally, EIP policies typically offer much higher absolute benefit caps than individual policies — some group schemes can cover total earnings above £500,000 per year, which is not achievable under most individual IP products.

The Deferred Period and Sick Pay Alignment

Like all income protection policies, EIP has a deferred period — the waiting time from the date of incapacity before the insurance benefit begins. The most common deferred period chosen for senior executive EIP is 26 weeks (six months).

This aligns practically with most employment contracts: senior employees typically receive full contractual sick pay for six months (or at least a reduced sick pay for that period). The EIP kicks in when the employer's own contractual obligation ends — so the employee transitions seamlessly from employer-funded sick pay to insurer-funded EIP benefit, without a gap.

For higher earners with only one month's contractual sick pay, a shorter deferred period (13 weeks) may be more appropriate. For those with very robust contractual sick pay, a 52-week deferred period reduces the premium significantly.

The deferred period decision should be made in the context of the employer's HR policies and the employee's contract, not in isolation.

Underwriting: Group Free Cover Limit

One of the advantages of a group scheme is underwriting simplicity. Most group EIP policies operate a "free cover limit" — a maximum benefit level below which employees are automatically enrolled without individual medical underwriting. If the employee's benefit (based on their salary) is below the free cover limit, they are in the scheme immediately without needing to disclose their medical history.

Above the free cover limit, individual underwriting applies. For a newly joining executive whose income is very high, this may mean completing a medical questionnaire and potentially providing further medical evidence. Established conditions may be excluded or attract a premium loading.

For companies with a small number of senior executives (say, a group of five to ten), the insurer may require individual underwriting for all members regardless of benefit level. Larger schemes benefit from more favourable group underwriting terms.

Employee Assistance Programmes

A feature that is often overlooked in EIP is the inclusion of Employee Assistance Programmes (EAP). Many EIP policies provide access to EAPs for all covered employees and sometimes their families. EAPs typically include:

• Telephone and online counselling services (mental health support, cognitive behavioural therapy access)
• Legal and financial helplines
• Occupational health referral services
• Management support and return-to-work planning

From the employer's perspective, the EAP is a preventative tool. Early intervention in mental health issues — the leading cause of long-term absence in the UK — can prevent incapacity before it begins, reducing the frequency and cost of EIP claims.

From the employee's perspective, access to confidential counselling and support services is a valuable workplace benefit in its own right.

What Happens When an Employee Returns to Work

EIP policies are designed to support rehabilitation and return to work, not just to pay out during permanent incapacity. Insurers typically:

• Employ in-house rehabilitation specialists who work with the employer and employee on a return-to-work plan
• Fund rehabilitation services including physiotherapy, occupational therapy, and psychological support
• Allow a phased return (reduced hours or adjusted duties) during which the employee is paid partly by the employer and partly by the insurer, without the claim ending immediately

This rehabilitation approach benefits everyone: the employee returns to productivity, the employer retains the individual's skills and knowledge, and the insurer reduces the duration (and cost) of the claim.

The International Employee Challenge

EIP policies written in the UK are typically designed for employees who are UK-based. The policy's terms may explicitly restrict coverage to employees working within the UK, or may include overseas coverage up to a limited number of days per year before it lapses.

For companies with internationally mobile senior employees — those based in Dubai, Singapore, the US, or elsewhere — the standard UK group EIP arrangement is unlikely to provide adequate coverage. Options include:

Individual international income protection. A personal IP policy arranged for the internationally mobile employee, structured to pay out regardless of country of residence. This provides genuine coverage but at individual (not group) pricing.

International group income protection. Some specialist insurers provide group IP that is designed for multi-jurisdictional employee groups. This is less common but is increasingly available through Lloyd's market brokers and specialist international group benefit providers.

Employer self-insurance for short-term incapacity. Some international employers with smaller employee groups simply continue to pay salary for a defined period of incapacity from their own resources, and purchase individual long-term disability cover for specific senior executives.

For any company employing senior people across borders, the gap between assumed coverage and actual coverage for internationally mobile employees is one of the most common and most expensive protection oversights.

Comparing EIP with Individual Income Protection

For most senior employees, EIP and individual IP are not alternatives — they are complementary. The limitations of EIP that make individual IP valuable alongside it:

• EIP ends when employment ends. Individual IP continues regardless of employer changes.
• EIP benefit may not cover total income including dividends, carried interest, or freelance income. Individual IP can be structured to include non-salary income in some cases.
• EIP typically pays to the employer, not directly to the employee. Individual IP pays directly to the individual.

Many financial advisers recommend that senior executives have an individual IP policy as well as being covered by their employer's EIP — the individual policy provides continuity and coverage for income components that the group scheme may not include.

How Global Investments Can Help

Global Investments works with companies and senior executives to structure protection that is appropriate for complex remuneration, international mobility, and long-term career plans. Whether you are an HR director reviewing your company's benefit structure, a CEO ensuring your own protection is appropriate, or a business owner planning benefits for key staff, we can help you understand the options and identify the most efficient structure.

For internationally mobile executives in particular, the gap between UK benefit schemes and genuine global coverage is a risk that we can help you close. Contact us to arrange a protection review.

Tax treatment depends on individual and company circumstances and may change. EIP terms and conditions vary between insurers. This guide is for information purposes only and does not constitute financial or tax advice. Always seek regulated professional advice.