The importance of business protection is something that is often overlooked by business owners. Business protection is crucial for business owners to ensure that they are protected should they be impacted by unforeseen events such as ill health, accidents, temporary disablement, or loss of a key employee or business owner.
Having the right level of cover in the right areas helps to ensure that the business can continue with minimal disruption should the unexpected arise.
Business protection is available for shareholders, key employees, partnerships and sole traders. It can be put in place to cover the repayment of a business loan in the event of a serious illness or death of a key person or partner within the business.
The type of policy will depend on the type of business and it’s specific requirements.
Key Person Insurance
Key person insurance aims to protect the business from potential financial loss that could arise as a result of an unexpected serious illness or death of an important person within the business.
If a key person suffers a serious illness or dies, the policy proceeds will be paid directly to the business. The funds can be used to meet the company’s financial commitments, while it potentially looks to recruit a replacement or even restructure the business. In a situation where the employee suffers a serious illness, there is always the possibility that they may return to work, so the proceeds can be used to pay for a temporary replacement or replace lost profits to the business.
A potential serious risk for a partnership is the risk that one partner suffers a serious illness, or dies, resulting in their share of the business passing to their beneficiaries. In the event that the beneficiaries do not want to be involved in the running of a business, which is often the case, and if there are insufficient funds available to buy out the shares of the partner, this share of the business could be sold to a third party. A Partnership/Shareholder policy will protect the business, should this scenario arise and allow the surviving partners to purchase the deceased partner’s share of the business.
Business Loan Protection
A Business loan policy can be set up to provide a lump sum to the business in the event that one of the business owners or key people in the business suffer a serious illness or pass away. The policy proceeds can assist with business continuity and could be used to pay off any large overdrafts, commercial mortgages, loans (which may also have personal guarantees) and have to be repaid in the event of one of the named borrowers death.
Relevant Life Plan
A Relevant life plan is a life insurance policy that can be taken out by a company on behalf of an employee. The proceeds of the policy are paid out to the employees named beneficiaries if they die whilst they are employed by the business. This is a popular option as a death in service benefit for small businesses, and can be put in place for employees and ltd company directors.
The premiums can be treated as an allowable expense and are often tax efficient for higher earners because the premiums are paid by the business and not paid through personal net income which is subject to employee income tax.
The policy proceeds can be paid free of inheritance tax as long as the policy is set up with a discretionary trust in place.