A concerned adviser has warned that Covid-19 has made it harder for workers to secure income cover, especially if they pay themselves through dividends.
Aj Somal, chartered financial planner at Aurora Financial Planning, warns that clients who pay themselves through dividends may struggle to protect their incomes during the pandemic as their earnings may vary.
He says: “It can be difficult for clients who pay themselves via dividends as their earnings tend to vary, particularly during this Covid period. Clients could be paying for cover that they may not be able to claim for, due to their variation in earnings. But insurers need to understand that clients paying dividends would have a varying income over a number of years.”
When it comes to the obstacles to getting clients protected and evaluating whether income protection or personal sick pay (PSP) works best for most individuals, Somal argues that although IP may cost more, it is more comprehensive and therefore is the better solution for the majority of workers.
Somal adds: “l think IP is the best option for most people, as the benefit level can be paid until retirement, compared with a limited payment period of PSP.
“IP tends to cost more, and if the career changes or a significant level of earnings change, then the cover needs to be reviewed and full medical underwriting is required. PSP tends to have less medical underwriting and is a cheaper form of cover, however, the benefit levels tend to be term restricted.”
Although IP may suit many workers, there are still pitfalls to take into account.
Interestingly, Scott Gallacher, director at Rowley Turton, says he believes the obstacle to securing IP is not down to the cover itself, but how it is applied.
Gallacher says: “Most IP plans and providers, which is about 43 out of 49, actually accept dividends as income for the purposes of IP. So, this shouldn’t really be an issue in terms of getting cover. Perhaps the issue arises where you are in business with someone else and, if you do not have a different share class for each director, you might find that your dividends do not cease entirely if you are unable to work due to ill health.
“While your salary might cease – depending on the employment contract – your dividends do not necessarily cease.
“You’d see a significant fall in your income, which is obviously an issue. You could perhaps increase your salary with no dividends but other shareholders and directors might object. Even if you do, the national insurance and tax position is worse, so your net income is lower. So, there are significant issues but not necessarily around the cover itself.”
Read the fine print
Protection expert Alan Lakey has also weighed in on the debate and argues that when considering the most appropriate protection cover, it is important to read the small print for any grey areas, which can cause problems later on when arranging a payout.