What is business protection?

Mar 1, 2024 | Insurance, Investments

Put simply, business protection helps to protect your business should a shareholder, director, partner, or key employee suffer a critical illness or die. Having this financial protection in place is vital in allowing businesses to recover quickly and minimise the impact should the worst happen.

Any business, large or small, is likely to face the unexpected at some point, but you can reduce the risk by planning ahead.

In this blog, we’ll take you through some of the flash points where cover might be needed.

Some of the questions you should ask yourself.

  • What would happen to the business if one of my fellow shareholders were to have a serious illness or die.  What would happen to their shares, and could this mean a loss of control?
  • Would the surviving spouse or beneficiaries want to become involved in the business?
  • Do we have any key members of staff that if they were off long term or die, would have an impact on the profitability of the business? Losing their knowledge and skills.
  • Would my family be adversely affected financially by my death or a serious illness?
  • Do we have loans/obligations within the business, that would still need to be repaid?

If the answer to any of the above questions is yes, then having adequate business protection in place could help resolve these issues.  The pay out from a business protection plan could enable the company to continue trading, replace key people or protect corporate debt.  Alternatively, it could be used to buy out a shareholder family following their death.

Even if you have existing cover, it’s important you review this to make sure it still matches your current requirements.

I’ve detailed briefly below some of the areas you could consider.

Key Persons Cover

When business owners are asked what company assets they insure, they normally list their premises, plant and machinery, vehicles, computer equipment and so on.  However, they often don’t consider key members of staff that make the company run smoothly and profitable.

Who is a key person?  A key person is anyone whose death or disability would have a serious effect on the company’s future profits. This could be from senior director/shareholder, but equally could be a key member of staff, such as a top salesperson.

A key person insurance policy plan helps to safeguard a company against the financial impact of a death, terminal illness, or a specified critical illness of a key person.  The policy proceeds are paid directly to the business to help replace the individual and any lost profits.  The policy could help your business to continue trading.

Loan Protection

Often companies have borrowed within their business to meet ongoing costs or expansion, however, could the business manage the repayments if a key member of staff was to die or suffer a critical illness.  Business Loan Protection can help your business repay any debt should either of these events happens.

Shareholder Protection

If a business owner dies with no shareholder protection in place, then their shares may pass to their family.  This means the remaining owners potentially lose control over the business, with the family possibly having no experience in running the business or possibly selling their shares to people outside of the business, such as a competitor.

With the correct shareholders Protection in place, this can be avoided, because it enables the surviving owners to purchase the shares from the deceased owner’s estate.

This can help both parties.  The deceased members family know they have a willing buyer for their shares and have cash instead of shares in a company.  The remaining business owners know they can keep control of the business and they have the money to purchase the shares from the deceased members family.

This will help minimise disruption to the business and provide transparency to the deceased family as they have a clearer picture of what they will be receiving.

It can also be important to consider what would happen if a shareholder was to become critically ill and want to exit the business/retire.  The remaining owners may need the money to allow the ill persons shares to be purchased from them.  Therefore, as well as life cover, it’s worth considering critical illness cover.

Relevant Life

A relevant life plan is an individual death-in-service plan set up by your company and aims to provide a lump sum on death to your next of kin.

This is a tax efficient way of setting up cover, because if the taxman is satisfied the employer can treat the premiums as an allowable expense for corporation tax.  Also, HMRC doesn’t treat premiums paid by employers as a benefit in kind. This means employees don’t have to pay income tax on the premiums.  Nor are the premiums usually assessable for employer or employee National Insurance contributions. Lastly the benefits are paid through a discretionary trust and therefore should be paid free of inheritance tax.  This therefore makes this type of life cover very tax efficient.

How can we help?

Taking financial advice can give you the peace of mind that all options have been considered and cover is in place should the worse happen.

If you would an initial consultation to discuss your current position and your future goals, please get in touch.

The above summary is not a personal recommendation and is not an exhaustive list of all options. You should take advice before proceeding with any of the options detailed, so that you are aware of the benefits and any potential downsides/ risks. Financial protection policies typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.

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