Understanding the Importance of Business Protection
When it comes to your business, the hours of hard work you, your staff and key people put into it gives you knowledge through experience - something invaluable and vital to its longevity.
Protecting your business and the key players that help make it the success it is, is an important step in ensuring all of that gained knowledge and experience are covered should something go wrong.
Business Protection is a specific type of insurance which helps to protect a business from the financial impact should key employees, business owners or shareholders be diagnosed with a critical or terminal illness. It is put in place to ensure minimal disruption following the loss of a key employee or business owner due to death, critical illness or disablement.
Here we look at 4 key scenarios of business protection that are helpful to know if you are a business owner or shareholder and want to know the benefits of having this kind of protection in place.
1. Key Person Protection
Within a business, a key person pertains to founders or co-founders, directors, specialists and heads of departments. These people have vital roles within the business, which are core to its success. The loss of a key person will be difficult, not just emotionally but also from the loss of revenue and or the cost to recruit, train and bring a replacement up to speed. Insurance does not replace the person, clearly, but it can help with the costs to re-hire and also to provide for loss of income in the interim while the business takes time to recover.
Key Person Protection works on a Life of Another basis- using this route the company takes out a protection plan on the life of the key person, meaning if they suffer critical illness or death then the benefits of said plan would be paid to the company.
2. Relevant Life Cover
Relevant life cover provides valuable life cover for your employees and their families. It pays out a tax-free lump sum to an employee’s beneficiaries if they die while in your employment.
You or any of your employees can be covered as long as you are a UK resident and work for your business in a PAYE capacity. People who are not eligible for cover are sole traders, equity partners in a partnership, and members of a limited liability partnership.
Should you be a company director and currently pay for your life insurance from your own income, relevant life cover could also save you money as your company could pay for this cover instead.
One of the other advantages to Relevant Life Cover is that it can often be an appealing employee benefit that can help your business attract and retain higher-quality employees. It can be taken out in addition to an existing insurance, making for a very desirable benefits package. Furthermore, as this cover is available to companies of all sizes, it’s a practical option for smaller business who aren’t eligible for group insurance packages.
3. Business Loan Insurance
Put simply, Business Loan Protection Insurance will provide funds to repay a loan, commercial mortgage, or a director’s loan if one of the business owners dies or suffers a critical illness.
You can protect the full loan or mortgage amount with life cover, or life and critical illness cover and when you make a claim, the sum assured is either paid to the business or directly to the lender if the policy has been assigned.
4. Business Owner Protection
a) Company Buy Back arrangement
The loss of a business owner or shareholder can have the biggest impact on the continued success of the business. There is more than one approach to this scenario, however usually each business owner takes out a protection plan on their own life to the value of their share in the business. The plan will be written under trust with the benefits going to the other co-shareholders, also known as a ‘company buy – back’ arrangement. In the event of death or critical illness of the business owner, the other shareholders will receive the proceeds of the plan in order to be able to purchase the shares of the deceased or critically ill business owner. Like key person insurance that we wrote about earlier, this would be a company owned policy set up on a life of another basis. There are several requirements that you and your accountant would have to adhere to as part of the Company’s Act 2006 in order to make this a viable solution.
b) Shareholder Protection
Would you be prepared in the event of the death or incapacity of another shareholder? Shareholder protection can be one of the most important things you can do to protect your company to protect the future of your business. Shareholder protection pays out a lump sum to the remaining shareholders in the event a shareholder passing away. It also ensures that the shares are passed out to the right people and the company can continue to function as smoothly as it can.
This is usually set up as an Own Life in Trust policy- the shareholder takes out a plan on their own life and places this in trust for the other shareholders. In the event of them suffering critical illness or death the other shareholders of the business would receive the proceeds of the plan. This would then be used to buy the shares from the shareholders estate, if they have passed away, or from the shareholder if they are critically ill and unlikely to return to the business.
c) Protection for Partnerships
Protection for partnerships works similarly to shareholder protection in that they can take out a plan on their own life and write it under trust for the benefit of the other partners in the company.
d) Sole Trader Protection
Working for yourself can be liberating, but of course it does come with risks, specifically if you have no employees. In this scenario, the sole trader can take out a plan on their own life with the benefits going to their family. This protection will ensure that the family will have the funds to cover any business loans or liabilities.
This is, of course not a comprehensive list of scenarios, and there are many more things which you may wish to consider when protecting your business but it doesn’t have to be overwhelming .
Your financial adviser should be able to help with your specific needs and the protection which will best suit your business; including any additional protection for your employees, such as group income protection or critical illness schemes.
If you have any questions about the right protection for your business, please don’t hesitate to get in touch with us here at Clarus Wealth firstname.lastname@example.org
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