Lakey, who is the director of CI Expert and Highclere Financial Services, says: “It is now common for directors to enjoy a salary just below the national insurance minimum and to take income in excess of this as dividends. Both of insurer LV's IP and PSP plans will only include dividend income if it is paid 'in an established pattern'.
"This wording is open to many interpretations. It could mean the director receiving the same dividend payment each month, quarter or year. It could be a rising income or where dividends rise mid-year and fall back – any or all of these."
He adds: "Many directors will make dividend payments based on profitability and this generally changes year-on-year, particularly over the past two years. Other insurers do not include this stipulation, merely asking for the latest P60 and/or set of accounts. Advisers looking for certainty will need to determine how they deal with this potential problem. I prefer certainty to potential disputes, therefore I would always look away from PSP when dividends are being used.”
However, Lakey also says that advisers must evaluate each individual case separately as PSP can work well in some circumstances.
He says: “In other respects PSP works very well, although the £1,000 income guarantee is not as generous as many other schemes. The excellent doctor services courtesy of Square Health is included in both LV plans. The policyholder can also ensure that payments are made directly to his mortgage lender, which all advisers will know to be an extremely worthwhile option. Also, income is not affected by receipt of state benefits or sick pay from the employer.”
Covid-19 reveals income vulnerabilities
The importance of protecting income was highlighted last month by research from Halifax, which found that 37 per cent of the 2,007 Britons quizzed said they have experienced a loss in income since March 2020.
This was due to a variety of reasons including illness, facing furloughed hours, or taking time off work for caring duties.
So, it is unsurprising that 52 per cent now say that they would not be able to stretch their savings beyond six months if the main earner in their household fell critically ill.
Rose St Louis, protection director at Scottish Widows, says: “While the past year has been one of the most unpredictable any of us will ever live through, more common set-backs such as a main wage earner of a household having to take time off work due to serious illness, or the passing of a loved one, can also happen at any time.