INSURANCE FOR SOLE DIRECTORS: INCOME PROTECTION AND THE COVER THAT MATTERS

When you run a company on your own, you don't have the safety nets an employee takes for granted. No employer sick pay. No death-in-service benefit. No colleague to keep things running if you're ill for a few months. If your ability to work stops, your household income and your company's income can stop with it.

A handful of insurance types are built to close those gaps. This page explains what each one does, when it's worth considering, and where the tax treatment needs a closer look.

THE COVER MOST SOLE DIRECTORS SHOULD KNOW ABOUT

INCOME PROTECTION

What it is: A policy that pays you a regular income if illness or injury stops you working. Cover usually replaces a proportion of your earnings rather than the full amount, and payments start after a chosen waiting period (the "deferred period"). They continue until you return to work, reach the end of the term, or retire.

Why it matters: For a sole director, a long spell out of action hits your personal finances directly. Income protection keeps money coming in while you recover, so a health problem doesn't immediately become a financial one. If you also want the business's running costs covered, that is a separate policy (see business expenses cover below).

Benefits from a personal policy are normally paid tax-free where you have paid the premiums yourself from taxed income. Company-paid ("executive") arrangements are taxed differently.

RELEVANT LIFE COVER

What it is: A life insurance policy your company takes out on your life as an employee – which, as a director, you are. If you die or are diagnosed with a terminal illness during the term, it pays a tax-free lump sum to your family or chosen beneficiaries.

Why it matters: Because the company pays the premiums, relevant life cover is often more tax-efficient than a personal policy – the premiums are usually an allowable business expense and aren't normally treated as a taxable benefit in kind. The exact treatment depends on the policy being set up correctly and on your circumstances, so it is worth checking before you commit.

CRITICAL ILLNESS COVER

What it is: A policy that pays a tax-free lump sum if you are diagnosed with one of the serious conditions it lists – commonly including certain cancers, heart attack and stroke. You can use the money however you need to.

Why it matters: Income protection replaces earnings; critical illness cover gives you a single lump sum. That can pay down a mortgage, fund treatment, adapt your home, or simply buy you breathing room while you focus on recovery. The conditions covered and their definitions vary between insurers, so the detail is worth reading.

BUSINESS EXPENSES COVER

What it is: Cover that pays your company's fixed running costs – rent, utilities, and loan or finance repayments, for example – if you can't work through illness or injury. It typically pays out for a set period.

Why it matters: Your overheads don't pause when you're ill, even though your income might. This cover helps keep the business trading while you recover, rather than eating into reserves or taking on debt.

WHERE GOOD ADVICE EARNS ITS KEEP

Choosing between these policies isn't only about picking a product. It is about how they fit together, how they are owned, and how they are taxed. That is where working with a chartered accountant helps.

• We start with your situation. Your income, your dependants, your fixed business costs and where you want the company to go all shape what's worth having. There's no standard answer for a sole director.

  
  

• We keep the tax treatment straight. How a policy is owned and paid for changes its tax position, for you and for the company. Getting that right can make a real difference; getting it wrong can be costly.
  

• We look at the whole picture. Protection sits alongside your tax planning, how you draw income, and any longer-term plans for the business. We consider it together, not in isolation.
  

• We review it as things change. Your cover should keep pace with your life and your business. We revisit it rather than leave it to gather dust.

TALK TO US

We are Chartered Accountants, not insurance brokers, and we are not FCA authorised to advise on or arrange cover. What we can do is the part that sits on either side of the policy: helping you work out who the business is really dependent on, sizing the exposure on your actual numbers, and getting the tax treatment right so that the cover you pay for delivers what you expect it to.

Contact us for a conversation about what makes sense for you and your business.

This page is general information, not personal financial or tax advice. The right cover, and its tax treatment, depends on your circumstances – please talk to us before acting