99% of businesses in the UK are Small and Medium-sized Enterprises (SMEs). [1]
53% of SMEs would stop trading within 12 months if they lost an owner or key person. [1]
50% of SME owners have left no instructions in their will, or have any special arrangements, regarding their shareholding in the event of their death. [1]
Although these statistics highlight some concerning issues relating to many small businesses, these problems can be addressed through a range of business protection plans. Key Person Protection, Shareholder Protection and Relevant Life Protection are examples of plans that can provide financial security to businesses during a time of great stress – the death or illness of a director, partner or employee.
Key Person Protection
This type of protection can protect a business from the detrimental financial impact of losing a person who is integral to a business’s operations. The policy can pay out a cash lump sum in the event of the key person dying, becoming terminally ill or being diagnosed with a critical illness. The money paid out can then be used to replace the loss of profits following the key person’s absence, or to fund the recruitment and training involved in replacing the key person.
A key person could be:
A business owner
A director or senior manager
A technical specialist with expert knowledge of the business’s products or services
A salesperson who drives a large part of the business’s profits
A staff member who has long-lasting relationships with major clients
The above examples are by no means exhaustive. Anybody could be a key person, as all businesses are unique. It is important to look at the roles of all individuals within your business, to recognise where key person protection is needed.
Shareholder Protection
In the event of the death of a company director/partner, this type of protection could provide the surviving shareholders with sufficient funds to purchase the deceased shareholder’s interest in the company back from his/her estate. If necessary, the policy could also be written to pay out the proceeds if a shareholder becomes terminally or critically ill.
Without this protection in place, the deceased shareholder’s estate could sell their inherited shares to a third party, or a family member could choose to take over the deceased’s position as a director/partner. The loss of control by the surviving shareholders could have significant financial implications.
It is vitally important that the correct combination of protection policies, trusts and shareholder agreements are put in place, in order to effectively insure (and ensure!) the continuity of the business or partnership following the loss of a shareholder.
Relevant Life Protection
Relevant life protection is a tax-efficient assurance policy, which can be used by employers to offer a death-in-service benefit to their employees. The policy will pay out a tax-free lump sum directly to an employee's chosen beneficiaries in the event of their death, and provisions can even be made for the policy to pay out if an employee is terminally ill, or suffers a significant illness which leads to them retiring.
From an employer’s point of view, the main benefit of a relevant life policy is that it can help smaller businesses to attract and retain high quality staff. The policy premiums are also deductible for corporation tax purposes. The policy benefits the employee, as their loved ones can receive a tax-free lump sum if the worst happens, and the policy premiums are not treated as a Benefit-in-Kind, nor are they subjected to Income Tax & National Insurance.
This form of policy offers a tax-efficient way to take out personal life cover, as the policy pay-out does not affect an individual’s pension Lifetime Allowance. This is especially beneficial to high earning directors/employees with large pension funds. Having said this, a Relevant Life policy should never be used in place of the shareholder protection arrangements referred to above. Relevant Life policies are only available to limited companies.
There are a great deal of variables that must be considered when arranging any protection policy, let alone business protection plans. With so many insurance providers and policies to choose from, it is essential that you engage with a financial adviser, to guide you through the protection market and pinpoint the policies that suit the needs of your business.
[1] - http://www.legalandgeneral.com/files/library/protection/sales-aid/q41457.pdf