Business protection at a glance
While this is not a comprehensive table, this is designed to give you a quick overview of typical risks businesses face and how to manage them. Of course, much will depend on the make-up of your business and its people.
Area of Risk
Operating/Business Continuity Risk
Key person protection
Business loan protection
Relevant life cover, Group Death in Service
Executive Income Protection
Understanding the risks
There are a number of risks to consider should someone need to step back from the running of the business, and it’s important to think about how your business might be affected and what controls you need in place to protect the value of your shares, and the people who matter most.
Who owns your business? Who would own your business if a shareholder died? Who would you want to manage the business?
Surprisingly, six out of ten business owners state that they have no financial protection in place to cover the cost of purchasing shares should a business owner die. Depending on the shareholder agreement this often means that shares, and associated voting rights are passed on as part of the deceased’s estate; to beneficiaries as set out in their will, or under the laws of intestacy if there is no will in place. The beneficiary may then choose to take an active or passive role in the running of the business or may decide to sell the shares. If the remaining shareholders cannot raise the funds, this could mean selling to a competitor. Shareholder protection negates this situation by providing the surviving shareholder(s) with the funds to purchase the shares of the deceased shareholder from their estate.
Shareholder protection can be a good solution if the company is unlikely to have sufficient capital or retained profit to purchase the shares directly. It is important to have a formal legal agreement in place between the business owners which clearly sets out what may happen to their share of the business on death, or if they become either terminally or critically ill. It may specify how the shares will be bought back from the deceased’s estate and at what value. This ensures control of the business remains with the shareholders.
Operating/Business Continuity Risk
Is your business reliant on the contribution of a key person? What would happen to your profit, sales, customers, key relationships, shareholders and operations if that person fell critically ill, or died? Sometimes the effect that one individual has on turnover or profit is so great, that the business would struggle to survive without them. The impact of a loss of this nature could result in a lack of confidence leading suppliers to request payment upfront, financial providers limiting credit lines, a fall in share price, brand damage, or customers seeking alternatives. It is essential to have a business continuity plan in place which sets out how the business will operate and manage its obligations and continued profitability in the event of a change in circumstances.
Key person protection can help meet the financial needs of the business while a replacement staff member is found, or a restructure is undertaken. By identifying the key people in your business, we can help you quantify the financial risk to the business should that person become critically ill, or die. You will need advice regarding suitable life or critical illness cover with the sum assured payable directly to the business.
This cover can help your business to meet its ongoing financial obligations and provide stability for customers, employees and shareholders during an uncertain time.
Key person cover insures against two types of risk:
- Profit – if a business loses a key person who influences revenue, the policy provides a cash injection designed to replace lost profits and/or cover recruitment costs.
- Debt – if the business loses a key person, the money paid by the policy can be used to clear loans or other debt. Without a cash injection, investors, and creditors may lose confidence in the business’s ability to maintain payments and demand early repayment.
Many businesses borrow to support growth plans. Borrowing can be in the form of commercial loans, overdrafts, mortgages, and directors’ loans. As with key person protection, should a key person (owner; partner) become critically ill, or die, the repayment of debt may become an immediate issue.
Also on death, any directors loans become repayable to the deceased’s estate. This is a further debt that may become payable following the death of an owner director.
Business loan protection differs from key person protection as the amount insured is typically in line with a specific loan repayment term.
Attracting and retaining quality employees is fundamental to a business and offering a comprehensive employee benefits package beyond salary and bonus is important. Relevant life cover allows businesses to offer a death in service benefit to their employees and is available to small businesses for whom group life insurance schemes are not available or practicable. However, it’s important to note that this type of protection is only for employees who take a PAYE salary from the business.
Relevant life cover is also regularly considered by owner directors as a way of providing sizeable lump sum life cover (to cover personal debt and mortgage or to provide simply a lump sum on death for their family). The cost for this cover is deemed as a business expense and therefore reduces corporation tax. It is not deemed a Benefit in Kind (BIK).
Any plan proceeds are paid for the ultimate benefit of the nominated dependants of the deceased, the premiums paid by the employer allow the business to benefit from corporation or income tax relief.
The tax advantages to the employee are myriad. By placing the policy into a discretionary trust, the proceeds can be settled quickly, and fall outside the employee’s estate for the purposes of inheritance tax. Importantly, premiums paid are not considered a benefit in kind for income tax, nor are they subject to National Insurance Contributions. Furthermore, an employee’s pension lifetime or annual allowance is not impacted.
Senior Staff remuneration is usually made up of more than pay and bonus. It likely encompasses other monetary elements including pension contributions, dividends, commission and even overtime. Where staff are unable to work due to illness or injury, they may not be able to meet their basic income needs. Financial security is important to them and their family.
Executive income protection is designed for owners and high-earning employees of SMEs. The insurance company pays any claim proceeds direct to the employer. They then pay the insured person via PAYE. Cover can include employer pension contributions and national insurance contributions.