Given the course that 2020 has taken so far, we’re sure that you’re aware of life’s outstanding ability to produce the unexpected. Although no one likes to spend too much time thinking about worst case scenarios, for business owners it’s worth putting the steps in place to mitigate the negative effects to their firm should something bad happen.
After all, you don’t want yourself or your family to be worrying about your business during a difficult time. As far as we’re concerned, your personal life should always take priority in times like these.
If you have a business, you probably have some form of commercial insurance like employers’ liability insurance. However, it’s certainly worth considering some form of business protection insurance if you don’t already have it. These insurance policies can really take the pressure off you, your loved ones and your business during tough times.
Business insurance is about people too
Businesses are more than just their premises, equipment and bank balance. Most SMEs are reliant on one or two key individuals (likely the owners) who have the vision and commitment to keep it driving forward. You need to consider how the business would survive if it were to lose a crucial individual as a result of his or her ill health or death. This is where business protection comes in.
There are three different types of business protection insurance:
- Business Loan Protection
- Key Person Protection
- Share Protection
Business Loan Protection
Business Loan Protection can cover any type of commercial debt, from overdrafts to commercial mortgages. These allow owners, partners and directors to insure their outstanding debts so that they are repaid in the event of their death. Many loans, like Directors’ Loans, have to be fully repaid in the event of the director’s death.
The larger the debt, the higher the premiums will be. This said, for simple life cover this is one of the cheapest forms of business protection insurance.
Most commercial lenders ask for a named individual (or individuals) as guarantors on the loan agreement, in most cases the business owner or partners. Business Loan Protection insurance pays out in the event of the guarantor’s death.
If a business is unable to cover the cost of an outstanding loan in the event of a guarantor’s death, it could result in bankruptcy, leaving the owners’ personal wealth at risk.
Key Person Protection
Key Person Protection insurance covers a business in the event of a vital employee becoming critically ill or dying. This could be anyone in the business, not necessarily the owner or partners. For instance, if your main salesperson became critically ill, this could complicate relationships with your key clients, causing a loss in revenue.
Key Person Protection is essentially a form of life insurance which a business takes out on certain important members of staff. The business pays the premiums and the policy will pay out should the insured person die or become critically ill during the policy term.
Any payout is paid to the business so that it can continue to trade, rather than to the individual’s family. This means it shouldn’t be seen as a replacement for personal life cover.
When identifying your ‘key people’ to insure, you should think about staff members who have skills or experience that would render them irreplaceable in the event of their death.
With this type of insurance the cost of the policy will be largely dictated by the amount of cover that you are looking for. This isn’t always easy to calculate from the outset – you’ll need to think about the potential financial impact on the business of losing such a person.
You’ll also need to bear in mind factors like your long term business plans and when you think a key individual will retire when deciding on the duration of a policy.
If you are thinking about buying Key Person Protection insurance, consider talking to a financial adviser who specialises in this area. They can help you decide on the level and duration of cover you would need.
It may be possible to offset the cost of Key Person protection insurance against your corporation tax bill, as it is often treated as an allowable business expense. However, any eventual payout has to form part of the company revenue for that year, so it may increase your overall corporate tax bill.
Share Protection Insurance
Share Protection insurance provides a payout to buy back shares in a company in the event of a major shareholder’s death. It allows the other owners to keep the business in their hands, bringing stability at a crucial time.
When an owner or partner dies, their stake of the business normally passes to their family. And if this person is a majority stakeholder, control of the business could be lost to their relatives. Share Protection insurance can help the remaining owners buy back the shares in the business, ensuring they retain control while giving family members a lump sum.
Share Protection insurance has two parts – a life insurance policy and a legal agreement, known as a share purchase agreement.
First, each owner takes out a life insurance policy equal to the value of their shares in the business and they pay the premiums on their policy. As with all types of life insurances, the cost will vary depending on their age, health and other factors.
Then, the owners will sign a share purchase agreement. This is a legal document that explains how shares in the business can be bought and sold. Essentially, it gives the surviving owners the option of buying the remaining shareholding and the relatives of the deceased owner the option to sell.
If the remaining owners want to buy back their share using the payout from the life insurance, the relatives are legally bound to sell them. Likewise, if the family wants to sell, the remaining owners are legally bound to buy back their stake.
What about critical illness cover?
On all the above policies, you usually have the option to add on critical illness cover, which would ensure a payout if the person covered is diagnosed with a specific illness covered by your plan.
In most cases, this will push up the cost of your policy. It’s worth bearing in mind that although policies will generally cover the most common serious illnesses – such as cancer, strokes and heart disease, they will likely only cover serious cases of these diseases.
How can we help?
Business protection isn’t easy to get right. Getting financial advice can help you understand what level of policy you need and then get to grips with the finer points of each policy.
At Advisa, we have been delivering clear financial advice to business owners for 25 years. We take a collaborative approach; working in partnership with owners to deliver the right solution for their needs. If you’d like to discuss any aspects of business protection further, please get in touch.