This week’s podcast is all about business protection, which is often seen as complicated. It’s important to talk to a specialist who understands the policies and can match them to your needs. Michelle Costello, Business Protection Specialist joins us to explain this form of insurance.
What is business protection?
There are four main types of business protection to look at:
- Key person insurance
- Partnership and shareholder protection
- Relevant life plans
- Business loan protection
Business protection can seem quite daunting, but it’s very much the same as personal protection – it just uses different terms to describe the types of insurance available.
It is essentially life cover and critical illness, just with different names because businesses can be set up in different ways. The purpose is to make sure that you take the right protection for your type of business.
Relevant life cover
Relevant life cover is predominantly a death in service policy for yourself as a business owner. If you run a limited business and pay yourself a salary as a director of the business, you can apply for relevant life cover.
You can set a level of benefit you feel will be appropriate. You might choose a multiple of your salary or cover business profits over recent years – whatever works for you.
The main reason that people look at this over personal protection is that it’s tax efficient. You can pay for it as a business expense. You don’t pay tax or National Insurance on it, and most people therefore find that this makes it around 50% cheaper than personal protection.
The financial benefit is significant and gives you and your family the peace of mind that if anything happens to you, they are financially protected.
Should the policy have to pay out, the lump sum is also tax free in the same way as personal life cover. There are some limits to relevant life plans, and we would explain these as part of the advice process.
Who can be covered on a relevant life plan?
Relevant life plans are suitable for limited company directors and small business owners. If you have employees within your business, you can also put relevant life plans in place for them.
They will see this as a perk of working for you and it might help you retain that member of staff. Some employees might look at a job in the corporate world and be tempted by the benefits package – which usually includes death in service. So relevant life plans can help you retain the employees you’ve invested in, by protecting their family’s financial future should anything happen to them. It shows you care about them.
Key person protection
Key person protection is simply life and critical illness cover for a key person within your business. Let’s say you’re a director of your own company and you have are a key person within that business – you are the nuts and bolts that keep that business running. If you weren’t there, the business couldn’t continue. So for that reason, you can take out key person protection to protect the assets of the business against death or critical illness.
Again, it gives you peace of mind that your family could manage if you weren’t around. The fundamental difference between key person protection and a relevant life plan is that a key person’s protection is written into the business. Were it to pay out, the money goes to whoever you’ve named as the beneficiary.
Who can be defined as a key person?
It’s any employee within the business that you would define as being a key person. For example, if you run an IT firm and somebody is absolutely key for creating your software, and you were to lose that key person, how much of a financial impact would that have on your business?
If they are the nuts and bolts of your business, and they die or become critically ill, the impact would be significant. Key person protection allows your business to claim on the policy. The funds might help to cover the drop in income, or allow you to take on and train another member of staff to replace your key person.
Shareholder protection is fundamentally the same as key person protection. It’s life cover or life plus critical illness cover.
But this time around, because business can be set up either as limited companies, shareholdings, partnerships, or LLPs, this policy is for shareholders and partnerships.
Let’s say, for example, two of us were to go into business as shareholders. If something happened to me, my shares would automatically go to my next of kin. That person may have absolutely no interest in the business whatsoever, or aren’t capable of dropping everything to help run the business.
The shareholder protection allows the remaining shareholder or partner to buy the family out of the business and take sole ownership. That director can carry on running the business without needing to go to my next of kin. It gives each shareholder peace of mind that they’ve got autonomy and ownership should anything happen to any of the shareholders within the firm.
It puts you into control as a business owner, especially if this is a company you’ve been building for years. It keeps the business going at a crucial time when a partner or shareholder is not there.
Business loan protection
Again this is simplistically life cover, or life and critical illness cover. But this time, it’s designed to help repay any business debts. If someone within the business were to pass away or be diagnosed with a critical illness, a loan provider has the right to call in that loan.
Clearly, a business has taken a loan out for a reason. To have it called in at possibly the worst time for that business could be catastrophic.
Business loan protection reassures a business owner that if anything happens to them, the debt can be repaid. Then whoever takes on the business can maintain it and ensure that your loved ones are financially protected.
How an advisor can help
If business protection is something you’re interested in, it’s definitely worth speaking to a specialist. We will work with you to understand the business, how it’s set up and what your needs are as a business and as an individual.
We would never recommend attempting to do this yourself online. When you set up your business, you didn’t just set it up without going to an accountant for advice. This is the same thing. Seek professional help – we’re here to give you that support and assistance, and we don’t charge business clients, limited companies or individuals for advice.
Fundamentally, if you’ve ever been through a bereavement, you know that the last thing anyone should ever have to worry about at that moment is money. And there are things you can put in place that can eliminate that worry. We welcome anybody to reach out for advice and specialist knowledge on this subject.