My client takes the majority of his income in the form of dividends, split equally between his wife and himself. Can he obtain IP cover?
This situation appears most common among those who operate as a one-man limited company, but where their spouse has been appointed as a shareholding director, even though they play no active part in running the business.
A small salary equivalent to the personal tax allowance is often taken by the one performing the work. The rest of the income is taken in the form of dividends paid equally between the two shareholders.
In this situation, provided certain criteria are met, insurers should be prepared to provide cover based on the total of the two dividend payments, assuming the spouse has not sought separate cover, plus any salary drawn by the worker.
My company operates the following criteria in order to differentiate this type of dividend payment from dividends received on investments, which are not dependent on the ability to work:
If your income from your trade or business is received in the form of company dividends or distributions, we will include this amount as normal earnings for the purposes of this policy provided:
• The dividends are paid direct to you in lieu of regular wages in the period of 12 months preceding the onset of incapacity.
• The dividends are consistent with the level of regular wages or salary, which the paying company's trading position reasonably allows on a continuing basis.
• The dividends cease in the event of incapacity.
Nick Homer
