Would your business be protected in the event of illness or the worst happening? Here’s a quick guide to the different types of protection and why you might need them.
If you run your own business, you’ll know how challenging it can be and how much hard work and effort goes into making it thrive. While it’s understandable that your focus will mostly be on growing your business day to day, it’s important to plan ahead in case the unexpected happens so that your business is protected. It’s crucial to think about what would happen if one of your directors or a senior employee who makes a significant contribution to the business were to fall ill or pass away.
If you run your company with other directors, you may want to consider Director Share Protection and Key Person Protection to safeguard your company against the financial impact of the unexpected happening.
Director Share Protection
Firstly, let’s look at Director Share Protection. This is a life insurance policy which also has an option to add critical illness cover, which means that, in the event of a partner or shareholder becoming seriously ill or passing away, the remaining shareholder(s) have the means to purchase their share(s). In short, a Share Protection Arrangement sets out what happens if a director were to die. If there is no such agreement in place and a director/shareholder passed away, the equity in the business would go to the deceased person’s estate. This means that the company could end up being partially owned by relatives of the person who has died, and they may have no interest in or knowledge of the business. Or they could decide to cash in their shares and sell them to someone else who may not be suitable or have the appropriate knowledge of your business and the industry in which you operate.
If you have a shareholder agreement in place, the existing owners of the company can purchase the equity of the person who has died. The aim should be to enter into one agreement that covers all of the business owners.
If you add critical illness cover to the policy it will cost extra.
Just to summarise, this protection means that if an insured person dies, or is diagnosed with a critical illness, a lump sum is paid out to enable the directors to buy their shares.
Key Person Protection
Another useful form of business cover is Key Person Protection. This is a life insurance policy that covers the life of the key person but is owned by the business. In other words, the business pays the premiums. It is intended to be useful if the person covered has certain skills, knowledge or experience that have made a significant contribution to the success of the business.
The amount of cover required is normally calculated based on a proportion of business profits, usually the salary of the key person divided by the total salary bill, then multiplied by the previous year’s profits. Or it can also be calculated based on net profit multiplied by five.
Relevant Life Cover
This is a tax-efficient benefit that means you can pay your key employees’ family a cash lump sum if the person died while employed by your company.
It is often set up by smaller businesses as an alternative to life cover who aren’t big enough to set up a group life scheme. It’s seen as providing a valuable perk for directors and staff but also companies can save almost 50 per cent in tax compared to an ordinary life policy.
It is usually set up for company directors, high earners and key employees.
Relevant life cover can be linked to inflation so that the sum paid out takes into account the cost of living at the time the payment is made. Premiums rise with inflation. However, it can also be set up for a specified amount.
Cover is normally between three and ten times an employee’s salary. The cost of the premiums vary depending on age, lifestyle, health and the amount of cover required.
When considering any type of business insurance, it’s important to speak to an expert who can offer bespoke advice to suit your personal situation. Feel free to get in touch with a member of our friendly team for more information on any of the above.