If you own your own business, you’ve probably insured your premises, your stock, and your valuable equipment.
But have you considered what would happen to your business if you were to lose a key member of staff? Would that effect your profits or the operation of your business?
According to Legal & General, two in five businesses cease trading within one year of them losing a key member of staff. Almost half (46%) of new businesses cease to trade immediately.
And then, what if one of your shareholders were to die? Have you thought about how you’d buy back a deceased business partner’s shares or repay their business loan?
Luckily, there are protection arrangements out there designed to tackle exactly these sorts of issues. And, putting the right cover in place means that you’ll have the peace of mind that your business is protected, and can continue to trade, even if the worst were to happen to one of your important colleagues.
Read on for three types of business protection you should consider.
1.Key Person Insurance
According to Legal & General, more than half (52%) of businesses think they would cease trading in under a year after the death or critical illness of a key person. Despite this, fewer than one in five firms have any insurance in place to cover key workers.
Your key person could be:
- Your main salesperson who generates much of your business revenue
- Someone with very specific skills that are essential to your business but can’t be replaced easily
- The person who maintains good relationships with key partners
- Someone who plays a vital role in overseeing projects or procedures
- Someone with a significant financial stake in the business.
Think about your team and what would happen if one of them were to be off work for an extended period or, worse, to pass away. Almost every business will have at least one key person whose absence would have a negative effect on operations, sales, or profits.
If your business would struggle, it’s time to consider putting Key Person Insurance in place.
Key Person Insurance is taken out by an employer (it’s owned and paid for by the employer) and is designed to pay a lump sum to the employer if a key person dies or is diagnosed with a critical illness covered under the policy.
This injection of capital can significantly help your business to recover. You can use the proceeds to replace lost profits, or to find and hire a replacement. Consider that you may have to pay a recruitment agency – who can often charge up to 30% of the salary – plus the associated costs of relocation, “golden hellos” and share option buyouts.
Considering that one in two business owners believe their company could case trading if they lost a key member of staff, putting Key Person Insurance in place gives you the peace of mind of a financial cushion if the worst were to happen.
What would happen to your business if a key shareholder were to die?
A common scenario would be that a shareholder’s family would inherit their share of the business. However, it may be unlikely that the family want to be involved in the day-to-day running of the business. In addition, they may benefit more from liquid assets – cash – than a share in a business they may have no interest in.
But, in this situation, would the remaining shareholders have sufficient capital to buy the deceased’s share?
It’s a problem that could affect thousands of businesses, but research has found that nearly 50% of businesses have no specific arrangements for their shares if a shareholder died.
Shareholder protection is designed to provide a payout which is enough for the remaining shareholders can buy the deceased person’s share of the business. This can provide peace of mind for two reasons:
- The surviving business owners may want to keep control of their business without interference from the estate of the deceased partner
- The estate gets a fair market value for the shares.
This type of protection would normally be arranged with a policy being effected on the life of each shareholder. This might be in the individual’s name, written under trust for the other owners. Or the business itself might effect the cover, and put a suitable agreement in place to govern the sale and purchase of the shares.
If you have key shareholders in the business, this protection gives the remaining business owners and their families financial peace of mind. It also enables the remaining shareholders to buy the deceased’s shares and retain control over their company.
3.Relevant Life Cover
Relevant Life Cover is similar to most other types of life insurance. However, the advantage if you’re a business owner is that it can offer a tax-efficient way for you to arrange life cover benefits for either yourself or an employee.
This is because the cost of Relevant Life Cover is usually viewed as an allowable business expense. So, all premiums and paid benefits will typically qualify for full Income Tax relief, National Insurance relief and Corporation Tax relief.
Overall, if you’re a higher-rate taxpayer you can reduce the cost of premiums by up to 49% compared to a typical life policy. If you’re a basic-rate taxpayer this figure could be up to 40%.
Despite the benefits of this type of protection, more than two-thirds (69%) of businesses have never heard of Relevant Life Cover. This type of protection is ideal if you:
- Are an employed looking to provide “Death in Service” benefits to your staff, but you have too few employees to set up a full group scheme
- Are a high earning individual and you are likely to be affected by the pension Lifetime Allowance (£1,073,100 in the 2021/22 tax year)
- You want to provide your own “Death in Service” benefit without taking out a scheme for all of your employees.
To take out this type of cover, there has to be an employer/employee relationship. So, you couldn’t take out this cover if you were a sole trader or an equity partner of a partnership, for example.
We’ll help you to find the right protection
If your business would suffer from the loss of one or more of its key people, it’s vital that you put the right protection in place. As we have seen, premiums are often an allowable business expense, so can be a tax-efficient way of providing the reassurance that your business will survive if the unexpected happened.
Whether it helps you find a replacement member of staff, pay off business loans or buy a deceased person’s shares, it could give you peace of mind during a difficult time.
As business protection experts, we work with dozens of the UK’s leading insurers. This means we can scour the market to find the right cover for your company, at the right price.
Whether you’re looking for Relevant Life Cover, Key Person Insurance, or Business Protection, our experts will work closely with you to ensure you have the right cover for your needs.
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