Business Protection
What is business protection?
Business protection is a type of insurance policy that helps protect a business against possible financial losses when illness or death affects the owners or their employees. By including business protection in a firm's business plans, owners can help the business to survive and continue trading under seriously challenging circumstances.
How does the business type affect who owns the policy?
| Business type | Subsets | Definition |
|---|---|---|
| Limited company | Public limited company (Plc) | These business types constitute a legal entity and can own insurance policies on the lives of their employees, including directors or the business owners. |
| Private limited company (Ltd) & Partnerships in Scotland | ||
| Partnership | Limited Liability Partnership (LLP) | |
| Partnerships (England & Wales) |
These businesses do not constitute a separate legal entity from the partners/business owner. Although the partnership may have a name and a bank account, the business cannot own property or insurance policies in its own name. In a partnership, these assets may be held by one or more partners as nominee(s) for the partnership; these policies would not usually be owned personally if they are a partnership asset. | |
| Sole Trader | Business Owner |
What are the different types of business protection?
- Business loan protection
- Key person protection
- Shareholder/Partnership protection (Ownership protection)
Business loan protection
Business loan protection is life insurance bought by businesses to help repay business debts such as outstanding borrowing on a commercial mortgage if the owner dies.
Business loan protection is either a life assurance or life assurance and critical illness cover written on the life of the key individual(s) so that any money due can be used to pay towards the outstanding debt or loan. The money will be paid to the business where it is a company, Limited Liability Partnership (LLP) or Scottish Partnership. Where the business is a Partnership, the policy will be written on an 'own life' basis and may be placed in trust for the other partners.
Things to consider with business loan protection:
- The loss of the individual(s) who have guaranteed a loan
- If an overdraft, loan or commercial mortgage is unable to be paid, it could have serious implications for the business
- Director loan accounts should be repaid on death - where will this money come from?
Level of cover
The level of cover reflects the amount needed to repay the outstanding borrowings. The policy should be set up to reflect the terms of the borrowings and could be on a level or decreasing basis.
Tax implications
Premiums from business loan protection will generally be paid by the business. As a 'rule of thumb' the premiums will not qualify as a deductible business expense for the business. However, the benefits will not generally be treated as a trading receipt. It is important to clarify the position with the local inspector of taxes as this may not always be the case.
Trusts
Trusts are not normally required where the business is a company, LLP or Scottish Partnership: in these cases, the policy can be owned by the business. Trusts may be used where the business is a traditional partnership in England & Wales. Lenders will sometimes require an assignment of a policy as security for a loan.
Key person protection
What would happen to a company if a key employee, director or shareholder were to die or become critically ill? The cost to the company could be devastating. Key person protection is a life insurance policy bought by a business to help provide funds to replace staff and cover any lost income streams during a tricky transition phase with critical illness as an optional extra.
Who is a key person?
A key person is anyone whose death or disability would have a serious effect on the future of the business. A business could have several key persons, or just one. To identify who is a key person requires a thorough understanding of the business itself and could be due to an individual's skill, experience, knowledge and leadership.
Key person(s) can be found at any level or department within a business but could include:
- Owners
- Managing Directors
- Sales Managers
- Research & Development Staff
- Creative Specialists
- Technical Experts
- Sole Traders
- Minority Shareholders
Shareholder/partnership protection
What is shareholder/partnership protection?
Shareholder protection is taken out to allow remaining business owners/partners to buy the insured partner's or the shareholder's interest in the firm should one of the business owners die or become either terminally or critically ill.
How does shareholder protection work?
In the event of a business owner dying or being diagnosed with a terminal or critical illness, shareholder protection can provide a lump sum to the remaining business owners or shareholders. This means that for a valid claim made during the term of the policy, the lump sum could be used to help purchase the deceased partner/shareholding director or member's interest in the business.
What is the impact of losing a business owner?
The loss of a business owner can destabilise a business and result in financial difficulties for other shareholders. Shareholder protection ensures the surviving shareholders have the opportunity to stay in control of their business by providing the cash to buy out another shareholder if they die or suffer a terminal or critical illness.
How do I calculate the value of a business?
Once you have established a need to protect a business against the loss or illness of a major shareholder, the value of their share of the business will determine how much cover is required.
Business share owners may have a clear understanding of the value of their business. However, if this is not the case, the calculation outlined below could help you work out the amount of cover you may need to apply for. The amount of cover needs to be established and justified for financial underwriting purposes and you will need to demonstrate how the figure has been reached.
Business value calculation
There are many ways to value a company and determining the value of a business is subjective. When professionally valued, the factors influencing the company can include:
- profit growth
- market position
- net asset value
Valuation methods could range from allowing the company's auditors or an expert valuer to fix the price of the business or put a fixed price on the transfer of any shareholding, for example £1 per share.
The sum assured should be the equivalent of the individual's percentage shareholding.
Whenever you are looking to value a business, it is important you refer to the company's Articles of Association and any shareholders' agreement to see if there are any restrictions on the transfer of shares. The amount of conditions relating to the transfer of the shares will affect their value. Many Articles simply allow the directors the discretion to refuse to register the transfer to any person for any reason. Larger companies may have more complicated restrictions.