Business protection insurance is an invaluable form of insurance for businesses, especially small businesses. Insurance companies offer insurance that is specifically designed for businesses. Business protection insurance can be divided into four key areas: business loan protection, key man insurance, relevant life cover and shareholder protection.
Each of these covers a different business risk, so it is important to understand what each policy covers, and to assess what is right for your business.
Business Loan Protection
Business loan protection cover can be taken out by a business so that it can repay any money that is owed if there is a critical illness or death of an important person within the company. This could help to prevent the business from falling into debt or even closing down.
For example, if there is a Directors Loan Account within a company, this has to be paid off in the event of the death of a director1, and business loan protection can be used to ensure that there would always be sufficient funds to do this.
Key Man Insurance
Key Man Insurance will protect your business in the event of losing an important member of staff, through death or long-term illness. This can cause a considerable amount of financial damage. According to a study from L&G, nearly half of new businesses would likely shut down if a key member of staff became critically ill or passed away2.
This is important, as the future of most companies is intrinsically linked to a handful of important individuals who run the company, especially if the person makes the deals and handles contracts with clients.
Relevant Life Cover
Relevant Life Cover is ideal for key members of staff, such as CEOs, senior executives and company directors. This is an assurance plan that will pay out a lump sum of money to the person’s loved ones. It is worth noting that some of these plans only last for five or ten years, so you may need to renew the plan further down the line.
This policy is fairly similar to Life Insurance, but it is much more tax efficient. It can also benefit employees, as well as the person’s immediate family. It is tax efficient because it is classed as an allowable business expense, as it is paid for by the company rather than the employee. It is also tax deductible, and it won’t count towards any other pension allowances that the person may receive3. This means that it is a very financially rewarding plan for both the employee and the employer.
The business can guarantee that the money will go to the family of the employee, as the policy will be written in trust. This is a legal document that will clearly state where the money should be paid to. The amount will also be tax-free.
Shareholder protection insurance will help to look after your business if a shareholder becomes critically ill or dies. If this happens, the Shareholder Protection policy will pay out a sum of money to the company owners, which is then used by the owners to buy out the deceased shareholder’s interest in the business4. This makes it easier for business owners to retain full control of their business in the event of illness or death of a key shareholder, and it can also prevent the business from closing down or going into debt.
If you do not get Shareholder Protection and a major shareholder passes away, it is possible that their part of the business will be given to their immediate family. This isn’t an issue if the family is happy to work alongside the business, but it could cause lots of problems, as owners could lose control of their business if the shares are sold to a third party, and the company could even be taken over by the family.
A Shareholder Protection policy can help to prevent this, making sure that the business stays in the hands of the business owner.
How Shareholder Protection Works
Imagine that you have set up a business with two old colleagues. After a few years, the business is doing well and so you all leave your old jobs to focus on your new business. A few more years pass and the business is doing very well, but then unexpectedly, one of the other business partners passes away. His shares in the company go to his children who know little about business, and so they quickly decide to sell the shares for a lump sum of money.
Ideally, the business would be able to buy the shares back, so that the remaining owners have full control of the business, but it is possible that the shares will be too expensive for the business to buy without putting itself under financial pressure.
This scenario could even result in the family selling the shares to a more successful rival business who can afford to pay for them, which could result in the eventual closure of the business. Thankfully a Shareholder Protection Plan would ensure that this doesn’t happen, as it would provide a lump sum to help pay for the shares in the business, in the event of illness or death.
The plan guarantees that the remaining owners and partners remain in control of the shares and the company, as well as ensuring that the family of the deceased is financially compensated. This benefits everyone who is involved, and it ensures the protection of the business.
This would help to prevent any further disruption to the business. It can be very difficult for both the family and the owners to go through such a loss, and the last thing needed at that time is a financial disruption for either party. A Shareholder Protection policy can ensure that the business can continue to run smoothly no matter what happens.
1 AIGlife.co.uk Business Loan Protection 2 Glaisyers.com Half of SME’s ‘Would Not Survive The Loss Of A Key Employee” 3 Businesscoverexpert.com Save Tax With A Relevant Life Policy 4 Moneytothemasses.com What Is Shareholder Protection Insurance?