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Business protection and making sure you are adequately covered

Would your business survive without business protection? What impact would a key person dying have?

24 January 2020, at 9:00am

According to a survey undertaken by leading UK insurer Legal and General, 40 percent of businesses would cease trading in under a year if a key person or owner died or became critically ill. This suggests that many businesses aren’t adequately covered and should seriously consider reviewing their cover to ensure their business could continue to operate in the event of unforeseen circumstances.

Key person protection

What is it and how does it work?

Put simply, key person protection (also known as key man insurance or key person insurance) is a life assurance policy taken out to cover the life of a key person within your business. It insures a business against the financial loss it would suffer if a key person in their business died or were diagnosed with a specified critical illness, if chosen, during the length of the policy. It also pays out if the key person is terminally ill and meets the policy definition, except in the last 12 months of the policy. The policy is owned and paid for by the employer, so any pay-out is payable to the employer.

Why should I consider it?

Losing a key person in your business could have a severe impact. The business could suffer badly, with sales and profits falling and increased workloads for remaining staff.

Key person protection is designed to pay out a lump sum on the death of the insured key person, during the length of the policy. The lump sum could significantly help the business to recover as the proceeds can be used to help replace lost profit or with finding and hiring a replacement.

Shareholder protection

What is it and how does it work?

If a shareholder in your private limited company, member of your limited liability partnership or partner in your partnership were to die could you afford to purchase their share of the business? If not, there could be significant implications for the future of your business. Share protection can help you protect the ownership of your business in this situation.

Share protection allows the remaining partners, shareholding directors or members to remain in control of the business following the death of a business owner.

In the event of a business owner dying or being diagnosed with a terminal or specified critical illness, share protection can provide a lump sum to the remaining business owners. This means that in the event of a valid claim being made during the length of the policy, the lump sum could be used to help purchase the deceased partner's/shareholding director's/member's interest in the business.

Why consider it?

If a business owner dies with no share protection in place their share in the business may be passed to their family. This means that the surviving business owners could lose control of a proportion or, in some circumstances, all of the business. The family may choose to become involved in the ongoing running of the business or could even sell their share to a competitor. A share protection policy can help avoid these issues.

Relevant life plan

What is it and who is it aimed at?

A relevant life plan is a term assurance plan available to employers to provide an individual death in service benefit for an employee. It’s designed to pay a lump sum if the person covered dies or is diagnosed with a terminal illness, whilst employed during the term. A relevant life plan is paid for by the employer. Relevant life plans are similar to most other types of life cover except they aim to provide a tax efficient benefit provided by an employer for an employee.

It is aimed at employers looking to provide death in service benefits, but with too few employees to set up a group scheme; directors wishing to provide their own individual death in service benefits without taking out a scheme on all employees; or high-earning individuals, such as directors, where death in service does not form part of their lifetime allowance.

Why choose a relevant life plan over traditional life cover?

In many cases a big saving can effectively be made on life cover, as relevant life plans can work out far cheaper and more tax efficient than a typical life policy.

RT Financial Planners Ltd

Rob Tiffin, AwPETR DipFA, joined RT Financial Planners in 2010. Rob is qualified to diploma level and advises on specialist pension transfers. He works with businesses and individuals, in the main advising on pension and investment matters.

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