You may ask, what insurances for business are there and do I really need it?
Business protection is all about continuity. Do you run a business? If yes, do you know how you would cope if one of your key employees or even yourself fell critically ill, or the worst happened, they passed away suddenly? It’s an emotional time, however, you are still running a business and your customers rely on you, so what would you do?
Business protection can help to ensure that:
- the key people can be replaced
- corporate debt is protected
- shares from the deceased partners’ or director’s estate are purchased
What are the main benefits of business protection?
- Peace of mind – your business can be financially secure if something critical happens.
- Protection of shares in the business for a Partner or Director – the business is protected should they fall critically ill or die.
- Takes the pressure off a business owner or Director should they fall critically ill so they don’t feel any stress about having to return to work quickly.
- Gives customers a good image of the business if you have an effective disaster recovery strategy in place.
Many business owners shy away from business protection because they think it’s expensive or too complicated, however the way it is done is just the same as personal protection. The differences are that:
- Business protection usually deals with higher sums assured
- The claim is paid to the business and not the family member
Legal and General and Bright Grey are two of a few companies who offer a wide selection of business protection and they explain the details very succinctly.
The main types of business protection can be summarised as follows:-
- Key person protection
- Partner / Director / Limited Liability Partnership Share protection
- Business Loan protection
- Income cover for sickness
With Business protection, a company can purchase life cover or critical illness separately, or combine the two, each with their own specific terms of cover. So you can get a mix and match flexible menu of products, which covers different scenarios and costs. If you run a small business, products can be tailored to your budget, as it’s better to be covered a little than not at all.
Here are each of the main protection plans in a little more detail:-
What is Key Person Protection?
This helps protect a business from the financial effects of a Key person falling critically ill, falling terminally ill or dying during the term of the policy.
The effect of the loss of a Key person can be anything from reduced sales which obviously leads to loss of profit, to recruitment costs, disruption of innovation development and increased workload for the remaining staff.
Who is a Key Person?
Someone in the business whose role affects the overall profits of the business and whose knowledge, skills and / or leadership are crucial to the success of the business. Key people in a business can be for example:
- Managing Director
- Sales Director
- Head of Product Development
- IT specialist
- Head Technician.
Why would I need it?
The loss of a key person could have terrible consequences for any business, problems can be:
- Loss of important business contacts
- Loss of innovation, design and research knowledge and experience
- If that person has made a loan to the business as a partner or director, the loan would need to be re-paid.
All of these will affect the sales and ultimately the profits of the business
What does it do?
It is a life insurance or life insurance with critical illness plan, which is written for the life of the Key person, but it is owned by the business, so that any monies are payable to the business owner. The business itself pays the premiums not the individual.
This cover would make sure that any loans are paid, current staff could be trained up to step into their shoes or recruitment could be paid for to find a suitable replacement.
This plan applies to Limited Companies and Limited Liability Partnerships. An ordinary Partnership plan is written on an own life basis and can be placed in trust for the benefit of the other business partners.
What is Partner / Director / Limited Liability Partnership Share protection?
Any business can get into financial difficulties if they were to lose one of their business owners. This protection plan ensures that the remaining partners can stay in control of the business.
It does this by providing a sum of money to them, which means that in the event of a claim, the plan could pay out an amount that would cover the purchase of that particular share of the business.
What is Business Loan protection?
If you have a business loan, outstanding overdraft or commercial mortgage of which you have a guarantor, the loss of that guarantor can seriously affect the business.
Some Directors may have guaranteed their loans on their own property as security, therefore there is the need to make sure that any dependents are protected.
They also may have made loans to the business itself, therefore they will need to be paid to the estate of that deceased person.
It works by creating life assurance written on the life of the guarantor, so when the worst happens and you make a claim, the monies paid out will allow you to pay off any outstanding debt to either the business or a lender.
What is Income cover for sickness?
Do you know how you would cope if one of your key employees or even yourself fell critically ill, or the worst happened, they passed away suddenly? It’s an emotional time, however, you are still running a business and your customers rely on you, so what would you do?
If you are self-employed without staff, being unable to work for a long period of time could be disastrous for your business and your finances. You may have to cease the business and it could take all your savings, if you have any. Therefore, getting income protection is one way of making sure that you have money coming in to pay the bills and look after your family, while you get back on your feet again. If you are a Limited Company, this can be paid via the company or straight into your personal account if you are a Sole Trader.
It is generally called Income Protection cover by most Insurance companies and is essentially the same as individual income protection.
Income Protection pays out a monthly income if you as a business owner or your employee is either unable to work because of an illness or an injury that leaves them unable to carry out everyday tasks and meets the Insurance company’s definition of incapacitated. It usually covers between 50% and 70% of pre tax earnings.
Usually with Business Income protection the cover starts straightaway, so you or your business will receive payments immediately. However you can opt for this to ‘kick in’ after a particular time frame in line with your savings.
The payments will continue until one of the following happens:
- They recover and return to work
- They no longer meet the definition of incapacitated
- The insurance policy ends
- The payment period stated in the policy ends. There is a choice of payment periods of 1yr, 2yrs or Whole of Term, which is up until retirement age.
- They die
Some of the insurance companies have additional products, which gives the person support to help them cope with treatment and rehabilitation and how this can affect them and their families.
It is never too late to invest in protection for your business or business income in order to make sure you have continuity and most importantly piece of mind that the profits of the business are not lost if you as the owner or a member of the business falls ill. You may think that it won’t happen to you, but it happens to many businesses and if you are not prepared it could be the downfall of any sized business depending on the person involved.
All policies can be set up in Trust apart from Key Person policy (it is in a life for another).
The benefits of putting the policies into Trust are:
The payments for claims are made more quickly. It avoids the delay of their representatives having to obtain a Grant of Representation before they can deal with the policy which can take several months.
Where the appropriate polices are written in trust, proceeds may not be subject to Inheritance tax. This tax is payable on any part of an estate worth over £325,000 at 40% (2011/2012), however if you put the policy into trust, then you can gift some or all of the benefits of the plan to other people. Therefore they would no longer be part of the policy holder’s estate and not subject to inheritance tax on death, however trusts can be subject IHT through Periodic charges and Exit charges.
It shows that it’s never to late to invest in protection for your business, the owners and employees in order to make sure you have continuity and most importantly piece of mind that the profits of the business are not lost if a member of the business falls ill or dies. You may think, like personal life insurance, that it won’t happen to you, but it happens to many businesses and if you are not prepared it could be the downfall of any sized business depending on the person involved.