The Importance of Business Protection
Protecting your business from the impact of death or serious illness of a Key Person
By Victoria Hicks – PCWM
Like many MMB readers, I appreciate the sacrifice, dedication and hard work that goes into running your own business. I also know the benefits that this can bring, whether its financial freedom, flexibility, creating a legacy or making a difference.
But as you sit down for your next board meeting to discuss your business plans, I want you to think carefully about what is often the biggest risk to a business, but remains largely overlooked; the death or serious ill health of one of the owners or key members of staff.
The UK economy is made up of small businesses, with over 5.5 million private sector businesses in operation at the start of 2016, 95.6% of which had fewer than 10 employees. (Department for Business, energy and Industrial Strategy).
At about the same time, Legal and General carried out a survey of over 500 business and found that 95% have at least one key individual within the firm who is directly accountable to some or all of the profitability, but the majority of them had no protection in place for the death or serious illness of that individual. Of those surveyed almost 53% expected their businesses to cease trading within a year if that occurred!
These figures are shocking but unfortunately not surprising, as for many its not a lack of willing to put these insurances in place, but a lack of understanding that these insurances are relevant or awareness that these insurances are available.
Here at MMB Magazine, we want to provide you with the information to improve awareness, protect your business and safeguard your future.
What is Business Protection?
Business protection can help a business to continue to trade if an owner or person key to the business dies or becomes terminally or critically ill. Proceeds from an insurance policy can help to replace a key person, clear debt, or purchase shares from the deceased shareholder or partners estate.
For many, the assumption is that this could be a lengthy or complicated process, or it may be too expensive, especially for those companies just starting up, but this does not have to be the case. There are a range of options available, and highlighting your risks, and understanding the costs involved to insure against these risks, will allow you to make the best decisions for your business.
Let’s run through some of the popular business protection options available.
Key Person Protection
If a business loses a key person who has a significant influence on revenue, this policy provides a cash injection into the business which
can help with the following:
• Replacing lost profits during a period of disruption
• Recruiting and training new staff members
• Providing the funds to pay sick pay if the claim is related to a critical illness
The insurance contract is owned by the company with the claim proceeds being paid directly to the company. Costs will vary and are dependent on the age and health of the person being insured, the amount and type of cover required and the term of the cover.
Working with an adviser, you will be able to obtain a range of quotes covering different scenarios to understand the best option for your business.
Shareholder or Partner Protection
Losing an owner can have a huge impact on a small business. As well as the day-to-day issues, there can quickly be financial difficulties, and conflicts between the family of the deceased and the remaining shareholders or partners.
If a partner or a shareholder dies or is diagnosed with a critical illness, would the remaining shareholders and partners have the funds available to pay the deceased estate for those shares or pay the shareholder partner for the value of their shares if diagnosed with a serious illness?
The proceeds from a Shareholder or Partner Protection policy can help the remaining owners buy the affected individuals share of the business. Without this protection, the remaining owners could lose control of the business, or have to raise finance which may be expensive, or not possible.
There are different ways to set this style of arrangement up, and it is important to initially speak with a financial adviser who will provide a range of quotes and options. The adviser should also highlight where taxation and legal advice may be required to ensure these types of arrangements are set up appropriately and tax efficiently.
The Legal and General Survey of 2016 found that 65% of businesses had some form of debt, with the average being £176,000. If your company has debt, whether this is a mortgage, a business loan, or most commonly a directors loan, the loss of a key person in a business, especially where this person has guaranteed a loan, or is owed the money personally (directors loan account for example) can be very serious.
The following should be considered:
• Would investors or creditors call in their debts if they are no longer confident the business can keep on top of them?
• If a personal investor or owner dies and money is owed to them, their estate will recall this debt on death. Do you have the money available to repay this debt?
Understanding the value of your business debts, the risk of death to the repayment of these debts, and implementing an insurance contract to provide the business with the proceeds on claim, could make all the difference to your business being able to continue in this unfortunate scenario.
My Top Tips
Speak to a financial adviser with experience in this area. Most will offer a free consultation, at which point any advice costs should be clearly disclosed. You may be able to pay a fee for the advice, or your adviser may receive a commission from the premium you pay to the insurer.
Take the time to understand where the risk of death or serious illness of a key person could impact on your business. Think about profitability, training and recruitment, the ability to repay debt and paying a deceased shareholders/partners estate for their share of a business.
Regularly review your insurances as your business changes in value or shareholding, or you appoint new key members of staff.