Most businesses make sure they are covered against the effects of fire or burglary – but what about their people? Financial protection is a crucial part of the planning process for any business - unfortunately, it is one that is often overlooked.
At Chantler Kent Investments, we take time to understand your business needs and work with you to identify possible areas of risk and make suitable recommendations to protect you, your family, your business and your staff.
Business Loan Protection
Most businesses have some form of debt, be it overdrafts, loans or mortgages. These loans can help a business prosper and grow. But a significant proportion of businesses do not have any form of insurance backing this debt. If the owner died, or was taken critically ill, these loans could quickly become a liability. Insurance can help keep the roof on your business, protecting partners, members, directors and employees – as well as their families.
Business Loan Protection is a policy that can be used towards paying off debt in the event of death within the duration of the plan.
Directors’ Loan Protection
Some businesses struggle to get finance. Banks and other commercial lenders may be unwilling to advance credit to start-up firms, or may charge prohibitively high interest rates. As a result, many people starting a new business can end up investing their own money in it, often by taking out a mortgage on their own home. A Directors’ Loan effectively enables you to ring-fence this investment, so that when the business becomes profitable you can take it out again. This can be particularly important if you run the business with other directors. Individual directors can safeguard their own investments in the business by setting up a Directors’ Loan account. This is a loan to the business that has to be declared via the company’s accounts. It can also be set up so that you do not have to take profits out of the business. Almost one in three business owners (28%) are unaware that these loans have to be repaid in the event of the director’s death. If neither the director nor the business have life insurance, it may be difficult to repay these loans. This could leave companies with a black hole in their accounts and put a severe financial strain on the business at an already difficult time.
Key Person Protection
Many businesses do not consider the financial implications of losing a key member of staff. Negative effects can include:
› Loss of profits or sales
› The cost of finding and training a replacement
› Potential loss of customers and suppliers, if the key staff member was their main contact
Key Person Protection is basically life insurance, with or without a critical illness cover option, which a business takes out on certain important members of staff. It can provide some financial stability in the event of a key member of staff being taken critically ill or dying. The business pays the premiums, and if the insured person dies or becomes critically ill during the policy term, the policy will pay out the agreed sum to the business. This financial pay-out can help ensure the business remains viable, continues to trade, and has the opportunity to find a suitable replacement. Key Person Protection insurance is there to protect your business; if there is a pay-out, the money is paid to the business to help it continue to trade. It should not be seen as a replacement for personal life cover or death-in-service cover. Some businesses provide death-in-service payments as part of an employee’s benefits package, with the amount paid usually around three or four times the employee’s salary. This pay-out would provide some financial assistance to families who have lost their main breadwinner.
Share Protection insurance provides a pay-out to buy back shares, helping owners stabilise the business and ensure it is kept in their hands and not someone else’s. There are two parts to this insurance:
› A life insurance policy: This will pay out on the death of one of the owners
› A legal agreement: This sets out when and how these shares will be bought back and at what price
To set up a Share Protection arrangement, each owner takes out a life insurance policy, equal to the value of their shares in the business and written in trust at outset, for the benefit of the other business owners (or partners, if it is a partnership). As before, there may be the option to take out critical illness cover as well. Each owner pays the premiums on his or her policy; the cost may vary between owners, depending on their age, health and other factors. Obviously, if one owner holds a greater stake in the business – say a 66% holding – they will pay a larger slice of the premiums. The owners will also sign a share purchase agreement, which is a legal document detailing how the shares of the business can be bought and sold. This paperwork is retained by the business, along with the trust document and policies. If any of the owners die, then their insurance policy will pay out, providing sufficient funds for the other owners to buy the remaining shares of the business.
Relevant Life Plan
A Relevant Life Plan is a life insurance policy that is paid for by the business to cover directors or employees. If the insured person dies, it is the family that receives the pay-out, not the business itself. This type of insurance is also sometimes known as a “death-in-service” benefit. Many larger employers have a policy that covers all their staff, but such “group schemes” are usually provided as part of the pension scheme. For smaller businesses, perhaps employing just a couple of people, it is not always possible or cost effective to set up one of these collective policies. It’s important to remember that a Relevant Life Plan will only cover those who take a salary from the business. If you are a sole trader, or a partner, you are not eligible for this type of insurance policy. However, this does not stop you buying regular life insurance out of your own income in the normal way. A Relevant Life Plan policy can be used to cover company directors and those who own their own business, provided it is registered as a company in the UK and they take a PAYE salary from the enterprise.