Your business is something you have worked hard to build, so it’s understandable that you want to protect it from unexpected setbacks.
Many business owners look after their company by making sure they have the right insurance to cover their business premises and equipment. But would your business be able to survive without you or one of your key employees?
If something happens to the people you and your business rely on – including yourself – it could seriously impact the operation and profitability of your company.
Research from a leading insurer found that almost three in five business owners believe that the death or critical illness of an owner or key employee would have the greatest impact on their business.
Despite this, many businesses are not protected. Insurer Royal London reports that four in five SMEs in the UK don’t have business protection cover at all.
In an unpredictable world, something can happen to you or your employees at any time. So, it’s vital that you have the right business insurance in place.
Why business owners might need protection
In a study, one in four business owners said that their business wouldn’t survive for more than a year if a key employee suffered a critical illness or died.
What would you do if you, or a key member of your team, was forced to be off work for an extended period? Or, even worse, what would happen if they passed away? What impact would it have on the day-to-day operation of your business?
Business protection is there to help you to minimise disruption to your business caused by the death or ill health of a key member of staff. It can cover the key people in your business, and those with important or unique skills. It may include:
- You as an owner, director, partner, shareholder, or sole trader
- Your partner(s)
- Key people within your business.
Business protection can help to keep your business running in the face of lost expertise. It gives you the peace of mind that you can run your business without worrying about the future.
3 types of business protection you should consider
It doesn’t matter whether you’re a sole trader, or your business is a limited company, partnership, or LLP. However you trade, it’s likely that you will benefit from at least one of the following types of business protection.
Previously known as ‘key man cover’, key person insurance is designed to protect a company’s vital employees. It will provide your business with a tax-free lump sum if someone vital to the operation of your company either dies or is diagnosed with a serious illness.
This type of protection can be particularly useful for a small company, where the loss of a single key person could have major ramifications for the day-to-day running of the business.
If you make a claim, you will receive either a lump sum payment or a regular monthly sum. You could use this money to:
- Recruit a replacement
- Replace lost profits
- Pay for temporary members of staff to take on some work.
As a business owner, you should consider key person insurance for anyone who significantly contributes to the financial success of your business. This may be because of their skills, knowledge, experience, or leadership.
For example, you might want to insure yourself as the owner of the business or as a sole trader. You may also want to protect office managers, craftsmen, key salespeople, or others who are crucial to day-to-day operations. You may also want to cover employees with a very particular set of skills.
To work out who the ‘key people’ are in your business, think about the impact their absence would have on your company.
- How would your business function without them?
- What effect would losing them have on revenue or profits?
- Would your business have enough money to survive until you found a replacement?
Essentially, if your business would suffer from the loss of an individual, you should think about putting appropriate protection in place.
Many small businesses have multiple shareholders. But what would happen if one of your fellow shareholders passed away? Would you be able to afford to buy their share of your business?
In the event of the death of a shareholder, shareholder protection pays out a lump sum to the remaining shareholders. It is designed to enable co-owners to purchase the deceased person’s shares in the business.
The amount of cover is usually equivalent to the value of the individual’s shares and is paid out as a lump sum upon their death.
Shareholder protection is also a good way of protecting your family if you die unexpectedly. For example, if you were to pass away, your family might inherit your share in the business. However, with you no longer around, they may have no interest in becoming involved in the day-to-day running of your company. They may also be more in need of liquid assets than a share in a business.
Shareholder protection provides the remaining shareholders with a lump sum so they can buy your shares. This provides your family with a cash lump sum equal to your stake in the business, and also relieves them of any ongoing responsibilities to the company.
If you want to provide a useful and valuable benefit to your employees, relevant life cover is a great option. Relevant life cover pays out a tax-free lump sum to an employee’s beneficiaries if they die while in your employment.
Under this type of protection, you can cover any employee (including yourself) if they are a UK resident and work for your business in a PAYE capacity.
If you’re a director of your company and you currently pay for your life insurance from your own income, relevant life cover could also help you to save money, This is because your company could pay the premiums for this cover instead.
Unbiased say that, if you’re a basic rate taxpayer currently paying £100 a month for personal life insurance, you could save 31.5% every month by switching to a relevant life cover policy. If you’re in a higher tax bracket than you could save even more.
Relevant life cover can be:
- A useful and valuable employee benefit. Offering this as a perk can help your business attract and retain higher-quality employees, and boost workplace morale
- Used in conjunction with other types of insurance making for a desirable employee benefits package
- Particularly useful for smaller business who aren’t eligible for group insurance packages
- Tax-efficient, because premiums are usually considered an allowable business expense, not a benefit in kind. This means that neither employers nor employees pay any Income Tax or National Insurance on premiums. You can also deduct the premiums as a business expense to lower your Corporation Tax bill.
Relevant life cover can also be an excellent choice if you’re a high-earning employee and you’re nearing your maximum allowances.
For example, Death in Service pay-outs are usually classed as a pension benefit for tax purposes and are therefore added to your pension pot. A pay-out of a multiple of salary could easily push you over the pension Lifetime Allowance (£1,073,100 in 2020/21) and result in a tax charge of 55%.
As relevant life cover pay-outs don’t count towards the Annual or Lifetime Allowance, you won’t pay this charge.
Note that the only people who aren’t eligible for relevant life cover are sole traders, equity partners in a partnership, and members of a limited liability partnership.
Get in touch
We’re business insurance experts and we can help you find the right policy at the right price. So, if you’re a business owner, and you want to make sure your company has the right protection in place, please get in touch.
Insuring for death, disease, and illness – the 3 clever ways to financial peace of mind
November 3, 2021
28 of the strangest insurance claims ever made
October 27, 2021
Are you making these 7 mistakes with your life insurance?
October 20, 2021
5 practical money steps you should take now if you’re self-employed
October 13, 2021
Life Insurance Payouts Explained
October 10, 2021
3 proven ways family income benefit can protect you
October 7, 2021