Some insurers may assess a director’s salary and regular dividends together when determining the appropriate level of relevant life cover.
Insurers have different approaches to remuneration. Some may include regular dividends alongside salary when calculating how much cover can be provided.
This matters because many directors pay themselves a modest salary and draw the majority of their income as dividends.
This is a common approach in limited companies. The leading insurers are usually less concerned with the form of the income than with whether it is genuine, sustainable and supported by the company’s ongoing trading activity.
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 make sure the level of cover is reasonable in relation to the insured person’s income and the 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, a reference from an accountant
For established limited companies this is usually straightforward. Insurers may be more cautious where the company has a very short trading history or where year-end accounts are not yet available.
Typical income multiples used by insurers
Cover limits and income multiples vary by insurer. The following figures are illustrative rather than guaranteed underwriting limits.
- Up to 15 times total remuneration (salary plus dividends) is common
- 10 to 12 times is typical where income history is limited or uneven
- Higher multiples, sometimes up to 20 times, may be available for younger directors with strong and well-evidenced earnings
Some insurers may include regular dividends when assessing remuneration, but definitions, evidence requirements and maximum cover vary by provider, age, other cover and the individual case. Your Broadbench adviser will confirm the applicable insurer criteria before application.
If the requested cover appears high relative to income, the insurer may ask for further evidence, reduce the level of cover, or suggest a lower amount.
What counts as acceptable proof of income?
To verify income, insurers will normally accept one or more of the following:
- company accounts, usually covering the last one or two years
- recent payslips showing salary
- dividend vouchers or a dividend history
- SA302 tax calculations, in some cases
- a letter from your accountant confirming remuneration levels
In practice, insurers are trying to avoid two situations. 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 and dividends vary from year to year?
Variation in dividends from year to year is quite normal for owner-managed companies. What matters more is whether the overall income pattern appears sustainable and supported by business profits.
Where there are large fluctuations, insurers may:
- use an average of the last 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 usually treat that year cautiously unless there is evidence that the income level can be maintained.
Read more in this guide: taking out a policy if profits are low or uncertain.
Low salary and higher dividends are normal
A low-salary, higher-dividend structure is very common in owner-managed companies. On its own, this is not a reason for an insurer to refuse cover.
Insurers generally focus on the total remuneration and whether the company’s accounts support it. In other words, income structure is rarely the issue. Your ability to sustain your income matters more.
Single-director companies
Single-director companies sometimes assume they will be treated differently.
Contractors occasionally ask whether IR35 status affects relevant life insurance.
Tax treatment depends on the policy, the company’s circumstances and the applicable tax rules. It should be checked with the company’s accountant or tax adviser before proceeding.
For more on these tax rules, visit IR35 Update.
In reality, relevant life insurance was designed with owner-managed companies in mind.
If your limited company is trading successfully and you can provide evidence of your income, the underwriting process is generally very similar to that used for any other business.
To find out what types of businesses can take out this cover, read who can take out a relevant life policy?.
You might also find these guides useful: tax benefits of relevant life and is relevant life a business expense?.