Question:

I took out an Income Protection Policy 6 years ago when I was self employed. I have recently been advised by my accountant to change to a Limited Company. I now get a low salary with extra income coming from dividends which is tax efficient, but would my Income Protection Policy still pay-out based on my low salary?

Answer:

I suspect that you have a Permanent Health Insurance Policy (PHI). This is designed to pay you an income in the event that you cannot work due to accident or ill heath. The income is paid after a pre-agreed waiting period, typically 3 or 6 months, and will continue until such time as you are fit enough to return to work, you die or the expiry of the policy.

This is one of the few insurances which you can be over insured for. The maximum cover is typically 50% to 60% of your income (varies from provider to provider). On the face of it, this is a big drop in income if you do need to claim but there are two reasons for this. The first is that the income is currently tax free, so based on your net income (after tax) the drop is not quite as great. The second is that the insurance companies do not want you to be financially better off by not working; they want you to have an incentive to go back to work, if health allows.

When you applied for the policy, the provider would have asked about your income (net profit) so they could underwrite you financially. In other words, is the cover you are applying for suitable? They also would have asked for details of your job and any hazardous pursuits which may affect their decision to provide cover.

In relation to dividends, some companies will accept them as an income others will not. Also if your job has changed you may have to notify the insurance company and this may affect their ability to continue to cover you. I would suggest that you contact the insurance company or even check the policy document to see if they will take dividend income in to consideration. If not, there are companies out there that will, but this will mean applying for a new policy and you may find that the cost is higher, however, at least you then know that it will pay if needed.