Business protection insurance is something we’ve been asked more and more about lately.
A great deal of planning goes into starting your business. You make a plan, find funding, and spend countless long nights and weekends trying to get it off the ground. You and your businesses partners have spent years building your company up to what it is now.
When you have invested so much time and effort into something, you want to make sure it’s safe and secure. Many companies insure their buildings and stock or draw up contingency plans to prepare their business in the instance of natural disasters or worksite accidents.
Yet a recent survey of business owners by Legal and General found that 50% of business owners have no arrangements in place regarding their company shares if they were to die.
In addition, a massive 40% of businesses believe that they would cease trading within just one year if they lost an owner.
A further 16% of the businesspeople surveyed had no idea what would happen to the shares upon the death of a shareholder, 60% of which had never even thought about it.
Business protection insurance – the worst case scenario
It’s a thought many of us try to put off. The death of a business partner or shareholder is a traumatic personal event on its own, but not preparing your company in advance could have a massive and lasting impact on other directors, partners, shareholders, and even your family.
If your colleague played an important role in the day-to-day running of the business, there may be a considerable loss of profits as a result of their death as well as confusion over the ownership of their shares.
Without a plan in place, one of three things may happen:
- The shares will be sold on the open market. If the remaining shareholders cannot purchase them, a new business owner could take control of the running of your business. They could be a competitor or want to take the company in a completely different direction.
- Even if the family of the deceased owner agree to sell some or all of the shares, the remaining partners may struggle to raise the finances, and further difficulties could ensue.
- Without a stable contingency plan and a clear ownership structure after the death of a shareholder or director, banks and investors may choose to change or cancel their funding.
Leaving this decision until it’s too late could have dire consequences for your company.
All business owners, directors and shareholders should consider Business Protection Insurance. The Financial Management Centre looks at what’s available on the market.
Business protection insurance – Business Loan Protection Insurance
Like a personal life insurance policy used to pay off a mortgage, this is a type of life policy that is taken out on a business’ owner/shareholder to settle any outstanding or extant finance facilities.
When the person covered by the policy dies, the insurance pays out to cover the company’s debts.
Business loan protection insurance is usually taken out on commercial loans, director’s loans, venture capital loans and personal guarantees. As the business pays off more debts, the premiums they have to pay are decreased.
Many business owners also don’t realise that directors’ loans must be repaid upon death.
Without the money to pay them off, these debts fall to the remaining directors and shareholders which may have severe cash flow and solvency consequences for the company.
Business protection insurance – Share Protection
This insurance allows the surviving shareholders to remain in control of the business after the loss of an owner. If a business owner dies or is diagnosed with a terminal illness, this protection pays the remaining shareholders the amount needed to buy out the deceased director or partner’s shares in the company.
If the premiums are paid by the business, the pay-out can be considered an expense and offset against corporation tax.
If the premiums are paid by a partner or shareholder’s account, then the insurance money would be considered part of the individual’s gross salary by the HMRC, and therefore be charged personal tax and National Insurance on it.
Business protection insurance – Partnership Protection
Depending on the partnership, without business protection insurance in place, different things will happen to the shares left behind by a deceased member.
- Limited Companies – an option agreement is needed in order to buy the shares after a shareholder’s death.
- Unincorporated Partnerships – following a member’s death, the partnership is dissolved, and the deceased’s family are entitled to their interest in the business.
Partnership protection is essential so the value of the deceased partner’s stake in the business is paid to the surviving members without any potential damage to the company.
Business protection insurance – Key Person Protection
Is there a partner in particular whose experience, knowledge, qualifications or skills are a vital aspect in the running of your business?
It is possible to protect your business against the financial losses if this person should die. It essentially works in three steps:
- You choose the key person you wish to insure.
- Quantify their value to the business. It can be difficult to put a price on such a valuable asset as a business partner. Many companies use the person’s salary, percentage of sales and other contributions to the business to decide their level of insurance. Insurers will have a maximum amount they’re willing to insure a person against.
- If the key person was to pass away, the insurance would be paid out in a lump sum to the business or the business owner.
Business protection insurance – want to know more
The Financial Management Centre is there for you at all stages of your business’s launch and growth. If you want help in planning how to deal with a situation like this occurring, please contact the Financial Management Centre on 0800 470 4820 or email us at [email protected]