What is Business Protection?
When business owners think about business protection they often think about protecting their business against potentially catastrophic events such as the loss or damage to premises or equipment.
However, whilst many businesses have this insurance in place they often forget to insure the most valuable asset — the people behind the business.
Business protection is insurance to help protect businesses from the financial consequences of shareholders, partners, sole traders and key employees being diagnosed with a critical illness or dying.
The insurance can be taken out to protect partnerships, shareholders, sole traders and Limited Companies. It can be set up to insure more than one life and in the event of a claim a lump sum would be paid out to the business or remaining owners.
Four main types of Business Protection
Key Person Insurance
Key Person cover is life insurance, taken out by a business on the life of someone crucial to the business. It protects your business from the financial fallout if a key member of staff dies or is diagnosed with a serious illness (if Critical Illness Cover is also included).
The proceeds from the policy are paid directly to the company, helping you to protect your profits or clear business debt to continue trading as normally as possible
Usually, business owners choose to cover those with particular skills, essential expertise or responsibilities. If you are the owner, founder or managing director, you’re likely to be a key person.
How does Key Person insurance work?
In the event of a key person’s death or serious illness (when Critical illness cover is included), your business is the beneficiary, rather than your employee’s relatives. It is designed to provide funding for you to help support the business against loss of profits, find a successor, or if it is unfeasible for your business to continue operating, provide the necessary funding for an orderly wind down.
The amount of cover is most typically based on a multiple of the key person’s earnings or linked to a percentage of their contribution to your profits. We typically see sums insured starting around £250k and exceeding £10m in certain circumstances but every situation will differ.
The insurance premium will also depend on the employee’s age – it will be higher for a person aged 60 than it would be for a person aged 40. Adding Critical Illness cover increases the cost of premiums compared to Life Only cover.
Shareholder protection is designed to provide a business with a vital safety net during a difficult time. The loss of a shareholder through serious illness, injury or death can throw a business into uncertainty.
Shareholder Protection provides shareholders with the necessary funds to buy shares from each other if one of them was to die or was unable to work due to a serious illness or accident. It therefore prevents shares being inadvertently lost or shared with individuals outside of the business.
Structured correctly, it allows the family of the shareholder to benefit from an agreed value for those shares whilst providing the business or remaining shareholders with funds to allow the purchase without damaging any capital reserves or having to resort to a sale or borrowing.
If you have a policy in place already for this, have you reviewed the cover level to ensure it is in line with any movement in the value of the shares?
Partnership protection is designed to protect against losing control of a partnership in the event of a partner being diagnosed with a critical illness, terminal illness or if they die.
Partnership Protection works in a similar manner to Shareholder Protection. If a partner dies or wants to leave when they are diagnosed with a critical or terminal illness, the remaining partners may want to buy their interest in the business and keep control.
In practice they may not all have the financial resources to do so, therefore taking out partnership protection insurance gives the surviving partners the financial support they need to allow them to keep the business running and retain control in difficult times.
Business Loan Protection
Business loan protection provides funds to repay a loan, commercial mortgage, or a director’s loan if one of the business owners dies or suffers a critical illness. The policy will ensure the debt is repaid should the worse happen.
It is important to focus on the potential impacts of not protecting these debts. If your business fails due to the death of the owner or a partner and there aren’t sufficient assets to cover the debts, then a lender could seek repayment from the guarantor or their estate.
This could mean your personal assets, including your home, might be at risk which could leave a business owner’s family struggling to repay any business debts.
If a Directors’ Loan account is not insured, and the director dies, the business may have to sell assets at short notice to repay the loan. If it is unable to do this, the business could be forced into administration, leaving the director’s family out of pocket.