Can salary and dividends be used as proof of income for relevant life insurance?
Yes. In most cases, insurers assess a director’s salary and dividends together when determining the appropriate level of relevant life cover.
This matters because many directors pay themselves a modest salary and draw down the bulk of their income as dividends throughout the year.
This is a common method of remuneration. Insurers are less interested in the form of income, rather that the income is real, sustainable and can be supported by the limited company’s ongoing activities.
If you’re researching the product for the first time, read this guide: what is relevant life insurance?
How do insurers assess a director’s income?
When insurers underwrite a new policy, they want to ensure the level of cover is reasonable relative to the insured person’s income and their employer’s ability to maintain that income over time.
Depending on the provider and the size of the policy, they may look at:
- PAYE salary
- Dividends taken
- How consistent the income has been over recent years
- Company accounts and profitability
- Occasionally, they may request a reference from an accountant
This is usually very straightforward for established limited companies, although insurers can be more cautious if you have a very short trading history, perhaps with no year-end accounts yet.
Typical income multiples used by insurers
Insurance companies do not usually publish their multiples or maximum cover limits, however here are some typical multiples, based on industry norms.
- Up to 15 times total remuneration (salary plus dividends) is common
- 10 to 12 times is a typical multiple when there is little or a patchy income history
- Higher multiples, sometimes up to 20 times, may be available for younger directors with strong, well-evidenced earnings
Age, health, the company’s stability, and the size of the benefit requested all affect what is offered.
If the requested cover appears high relative to income, the insurer may request additional evidence, reduce the cover, or suggest a different level.
What counts as acceptable proof of income?
To provide proof of income, insurers usually accept one or more of the following:
- company accounts, often for the last one to two years
- recent payslips showing salary
- dividend vouchers or a dividend history
- SA302s, in some cases
- a letter from your accountant confirming remuneration levels
In practice, the insurer is trying to avoid two scenarios. One is where cover is requested based on income that cannot be evidenced. The other is where cover is requested at a level the business is unlikely to sustain.
What if my salary + dividends vary from year to year?
What matters more is whether your total income varies year on year, as that’s not typical. More importantly, the dividends are supported by ongoing business profits.
Where there are dramatic fluctuations, insurers may:
- use an average over two or three years
- base the cover on a lower recent year rather than the highest year
- ask for additional accounts or a reference from your accountant
If a company has had one exceptional year, insurers typically treat that year with caution unless there is clear evidence that it can be repeated.
Read more in this guide: taking out a policy if profits are low or uncertain.
Low salary, high dividends are normal
A low-salary, higher-dividend approach is common in owner-managed companies. It is not, by itself, a reason for an insurer to refuse cover.
The insurer is typically more interested in the total remuneration and whether the company’s accounts support it. In other words, the split is rarely the issue. The sustainability is.
Single-director companies
Single-director companies often assume they will be treated differently.
In reality, relevant life is designed precisely for this kind of business.
If your limited company is trading successfully, and you can prove your income, the underwriting process is very similar to that of other companies.
To find out what types of businesses can take out this type of cover, read who can take out a relevant life policy?
For the wider tax position, you can cross-reference: tax benefits of relevant life and is relevant life a business expense?