Business protection insurance – what’s available?
No-one ever likes to think about what we’re discussing in this article. However, for your fellow shareholders, directors, partners, and for your family, getting business protection insurance could not be more important.
The death of a shareholder, director or partner is a traumatic personal and professional event for everyone involved in a business. That is particularly so in smaller businesses where the deceased will have played a very important role in the day-to-day running of the business.
As business owners, particularly when our companies grow, we keep telling ourselves that we need to pass on what’s in our head onto our colleagues because, without these skills and this knowledge in the business for a prolonged period, the firm would really suffer.
What options are open to you now to cover your business, your staff, and your family just in case the worst happens?
Business protection insurance – share protection
Shareholder or partner protection is a form of insurance which gives surviving business owners the money they require to buy out the shareholding of a business owner who has died or who has been diagnosed as terminally or critically ill.
In a recent survey of business owners, Legal and General discovered the following…
- 40% of businesses would cease trading within one year if they lost an owner
- Over 50% of business owners have left no instructions in a will or special arrangements regarding shares
- 16% don’t know what would happen to the shares on the death of a shareholder. Of those 60% have never thought about it and 14% have never had the risks explained to them?
If a director, shareholder, or partner dies, it throws a business into turmoil. Uncertainty over the ownership of shares only compounds the difficult period that surviving directors and senior staff go through.
Shareholder protection pays out the proportionate share of the value of the business to the remaining shareholders. The premiums can be paid by the business or from a partner or a shareholder’s bank account. If the business pays the premiums, they can be treated as an expense and offset against corporation tax. If paid by a director or shareholder, HMRC treats these payments as part of the individual’s gross salary and will pay personal tax and National Insurance on it.
For limited companies, an option agreement is needed to buy the shares in the event of a shareholder’s death. For unincorporated partnerships, the partnership is dissolved on death and the deceased’s beneficiaries are entitled to the value of the deceased’s interest in the business.
What partnership protect does here is provide the funding needed so that the value of the deceased’s interests can be paid out to the surviving partners without causing any damage to the business.
Business protection insurance – key person protection
If there is someone in your business whose sales experience, knowledge, leadership or skills is vital, key person insurance provides protection against the financial loss caused if that person dies.
You choose the person you wish to insure, quantify their value to the company and then insure your business for that amount. The way many companies choose their level of insurance is as a multiple of the person’s salary or what the percentage of the persons’ sales and other contributions are to the business.
Insurers will have a maximum amount that they’re prepared to insure a person against.
In the event of the key person’s death, the insurance policy is paid out as a lump sum to either the business or the business owner.
Business protection insurance – business loan protection
Business loan protection is a form of life (and critical illness, if selected) policy that is taken out on a business owner or a shareholder to settle its outstanding and ongoing borrowings. Typically, business loan insurance is taken out on commercial loans, directors’ loans, venture capital loans, and personal guarantees.
The premiums your business pay reduce as the amount of money the business owes decreases.
Most business owners don’t know that directors’ loans must be repaid on death. If there is no money to do this or pay off other company loans in the turmoil that follows a shareholder’s death, then it can become a real struggle to continue to trade and find the funds quickly enough to make repayments in full.
Can we help?
Modina are bookkeepers – that’s what we do and we love doing it. We have lots of friends in the industry from tax planners to accountants to wealth managers to insurance companies. While we will not make any specific recommendations, we’re very happy to point you in the direction of someone we know and trust.
Please call your Modina team on 020 7183 8241 or email firstname.lastname@example.org and ask how we can help.