What is Business Protection?


Mike Carter

Mike Carter

Chartered Financial Planner

10 May 2022


If you are a business owner, you may have heard of “Business Protection” - but what does this actually mean?

The brief answer is, it helps business owners plan for the unexpected by providing cover to ensure the business can continue with minimal disruption following the loss of one of their key employees, or one of the business owners, through death or critical illness.

There are different types of business protection, with the arrangement being set up depending on the type of business and its particular needs. Let’s look at these different types of business protection and when each is most suitable.

What is Key Person Protection?

Put simply, Key Person Protection is a business insuring itself against the financial loss it would suffer if a key person in their business died or were diagnosed with a particular critical illness (specified within the cover) during the length of the policy. Losing a vital staff member or a company director can have a dangerously adverse effect, potentially resulting in a decrease in sales and profit, additional costs in hiring a replacement, or added stress and workload for colleagues. A staggering 70% of businesses say they would cease trading within a year if they lost a Key Person.

A Key Person can be described as an employee whose absence would cause a severely detrimental effect to the efficient running of a business; for example, this could mean their absence causes a drop in profits or the daily business functions are unable to continue. In broad terms, a Key Person is any individual in whose knowledge, skills or experience a company relies on to function profitably.

What constitutes a Key Person is entirely dependent upon the type of business and the nature of their industry or trade. A software development company would consider the loss or absence of a software programmer as extremely detrimental to their productivity, whereas for a sales company, losing a director of sales could have an immediate impact upon profit.

Key Person Insurance policies are owned by the business and not the individual employee that is covered. No matter the reason for the absence of a Key Person, the business should be protected and reimbursed financially by this potentially tax-deductible expense.

What is a Relevant Life Plan?

Often small businesses don’t have enough employees to be able to offer a group life insurance scheme. A Relevant Life Plan is a term assurance plan available to employers to provide an individual death in service benefit for an employee. It's designed to pay a lump sum if the person covered dies or is diagnosed with a terminal illness, whilst employed during the term.

It should be noted that Relevant Life Plans are not available where there is no employer/employee relationship - for example, sole traders, equity partners of a partnership or equity members of a Limited Liability Partnership.

This means that not only does the company offer this as an employee benefit, but it is also considered a legitimate business expense.  Despite being taken out and paid for by the individual's employer, the policy pays out to the family or dependents left behind, should an employee death occur.

The company itself does not benefit from this policy directly. Relevant Life Cover is written in trust, which ensures that the money is issued to the named receiver. This type of policy means that the lump sum is also tax-free.

What is Shareholder Protection?

The death of a business owner can have a profound impact on the foundations of a business, with both short- and longer-term implications for its stability and viability. As a business often represents not only the livelihood of the owner and their family, but also that of the employees and stakeholders, continuity of the business is crucial, and shareholders will want to protect against unexpected events to keep it running successfully.

Most shareholders will put agreements in place to set out basic rules when they set up or join the business, which will cover a number of key issues to help protect the business and each individual shareholder. The agreement often includes overall business strategy, management decisions and business policies. However, shareholder protection can be overlooked, and this can cause problems further down the line if the money isn’t available to the business or remaining shareholders to help protect it.

In the event of a business owner dying or being diagnosed with a terminal or specified critical illness, shareholder protection can provide a lump sum to the remaining business owners.

This means that in the event of a valid claim being made during the length of the policy, the lump sum could be used to help purchase the deceased partner’s/shareholding director’s/member’s interest in the business.

What is Business Loan Protection?

Businesses take out loans for many different reasons. Whether it’s to kick start the company or expand your operation, loans can provide temporary support when you need it. The ability to repay a loan normally rests with a few key people such as an owner or director.

If something were to happen to those people, the business needs a policy in place to make sure there is enough money to repay any outstanding loans. The death or critical illness of a key person can have a significant impact on the company and the remaining business owners may have difficulties meeting existing loan repayments.

Business Loan Protection ensures that a financial amount is paid to the business should this happen, and then provides the business with an opportunity to find a solution with a lender. Whether this is to repay part of the loan or agree on another repayment plan, it can help the business to stay running as normal.

Business Loan Protection is a life insurance policy or life insurance with critical illness cover that is taken out on the life of key individuals. It is set up and paid for by the business, and the amount of cover should reflect the amount taken out in loans and repayment amounts.

Get in touch

As always, reviewing your own business requirements and understanding what type of protection is applicable is something which should be discussed and reviewed on an annual basis to ensure you have the appropriate protection in place. If you would like to discuss anything mentioned in this blog, please don't hesitate to get in touch with myself or a member of our Wealth team.

 

Disclaimer: Johnston Carmichael Wealth Limited is authorised and regulated by the Financial Conduct Authority. 

This communication is intended to provide a general review of certain topics and its purpose is to inform and not to recommend or support any specific investment or course of action. 


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