Mortgage Payment Protection for Company Director - please help

foreversummer

Hi

Hubby is a director of his own limited company and is paid a low salary but takes dividends from the business to supplement his income. I understand this is fairly normal practise.

However, we've just moved and increased our mortgage somewhat and would therefore like to cover the monthly mortgage payment of £770 in case of accident or sickness. However, when I try to get quotes online it seems to suggest that the total benefit can only be up to 65% of his monthly salary. I phoned one of the companies and they said that the dividends cannot be taken into account.

If this is the case the maximum cover he can apply for is £330 (65% of his monthly salary) per month - not even half of the mortgage.

Can any of you insurance experts out there confirm that this is the case, or is there a way around it.

Foreversummer

Astaroth

PPI is more difficult for the self employed because of the fact that many companies will continue making profit and therefore directors continue to take their dividends irrespective of if they are "working" or not.

The other typical area of issue is the definition of working as many people whilst off sick continue to do paperwork/ read minutes etc and whilst this obviously isnt their normal full duties it is still work.

dunstonh

Also, as a director he cannot make himself redundant so there is limited benefit of having unemployment cover. He would be better off looking at a permanent health insurance.

foreversummer

Hi Astaroth & dunstonh. Thank you for your replies.

I've just done a quick search regarding Permanent Health Insurance, but again I see you can only have around 50 - 60% of your gross salary.

I'm back to this low salary topped up with dividends problem again. His salary is approx £6200. There would not be enough money in the business to draw dividends for more than a couple of months if he were unable to work. He is a driving instructor by the way, so business pretty much stops if he were ill. But I take it PHI will not consider dividends to be part of salary, therefore allowing a higher payout?

Astaroth

Unfortunately this is one of the issues of doing the typical tax fiddle.

Is he more a sole trader that happens to have gone limited or does he have a significant workforce in his company too?

This is much more Dunstonh's area of expertise than mine

foreversummer

Hi Astaroth

He has three other instructors who pay a weekly franchise fee to the company. The total of this is somewhere in the region of £200 per week.
But obviously there are expenses that would continue to come out of the business, ie advertising, and related costs in keeping these three guys working.

If he had PHI would they pay out even though the business continued to operate? I myself am also a Company Director and do the administration of the business, including liasing with the instructors. So if he were ill he would simply not work as I do everything including the book-keeping.

Foreversummer

courtjester

An alternative is to look at critical illness cover - which would provide for really serious events such as heart attack or stroke etc., but would not cover less 'serious' but debilitating temporary illnesses.

Critical illness cover is a bit like life insurance without the death, a sum insured is paid out if the serious event occurs.

You might want to review the structure of the company /directorship to see if you have the means one way or the other to continue the business during an absence of your husbands contribution.

As indicated, the low salary /high dividend tax approach is a trade off against disadvantages and other risks arising if you are really working in a 'sole trader' situation, i.e income stops if you stop working.

Dividends can only legally be issued out of company profits and hence if the company profits fall due to illness of one or more of the directors, it is clear why PHI insurers don't want to include dividends as 'income'.. potentially those dividends may disappear during a period of illness.

In the long term, it is only really a suitable tax format for businesses which operate through staff.

SavinginUnison

dunstonh wrote:

Also, as a director he cannot make himself redundant so there is limited benefit of having unemployment cover. He would be better off looking at a permanent health insurance.

In 2000 my husband was a company director and was made redundant by the three other directors. Tribunal later ruled it to be unfair dismissal though. We had been refused mortgage protection by everyone that we had gone to as they said that as a director he would know if redundancy was likely and therefore could not be made redundant as he would be making himself redundant. As it turned out in our case this was not true, the other directors wanted rid of him for their own reasons.
We had to sell our house PDQ and only just got back what we had paid for it three years earlier. I don't know what the answer is but do try and find some kind of insurance as I would hate to think of you in the situation that we found ourselves in. Good luck.

defender_of_the_weak

Paying salary and dividends is not a tax fiddle, it is totally legitimate. Given Gordon Browns penchant for squeezing every last penny in tax you cannot blame people for using the system to their advantage if possible and legal. I bet your directors receive masive dividends and share bonuses and yet no one sees that as a fiddle

foreversummer

You are quite right defender of the weak, we are certainly not involved in a tax fiddle. We are a legitimate company, working hard, earning a living and paying tax as set out by Gordon. We are also providing work for three other guys who too are working very hard and paying their way also. There is nothing wrong in looking for ways to legimately reduce your tax bill. I did not take Astaroth's comment personally though as I do not believe he meant it maliciously.

We are just looking for a way of protecting what we have built up should the worse happen. Quite happy to pay a decent premium for decent insurance cover and peace of mind.

SavinginUnison - Very sorry to hear of your problems. In our company it is just me and hubby who are the two directors so shouldn't be a problem. I hope you are getting back on your feet and wish you all the best for your future.

Just for the record, we are not after unemployment benefit, just some cover for accident and sickness, ie should hubby break a leg, need an op or something of that nature.

dunstonh - apparently this is your area of expertise. Would really appreciate anything you can add.

Foreversummer

dunstonh

Its not really my area of expertise. 90% of my business is investment/pension portfolio management. I have never really been that active on the protection side and I ceased being an insurance broker around 1992.

I cant think of any option off the top of my head that can get round the lower income, short of getting the accountant to increase the salary.