Top tips for buying business protection11/06/2015
Small businesses are collectively the largest employers in the UK, with 24 million people employed by SMEs. As such an important part of the UK workforce it’s essential that SMEs safeguard their future.
Losing a key person to illness or death isn’t something that we like to think about, but it can have disastrous consequences for a business. A recent report from Legal & General showed that 40% of SMEs would cease trading within a year of losing a key employee or owner, yet 60% do not have any cover in place to protect against this risk. Issues that can arise include loss of profits, loss of business contacts and specialist knowledge, or having to repay a loan made to the business.
Businesses can protect against the loss of a key person through specially tailored insurance policies, however, each business will have its own requirements and policies can differ greatly, so it’s worth thoroughly investigating the market before making a decision.
Top five tips for buying business protection:
1. Consider key person cover and shareholder protection. These are the two main forms of business protection. Key person insurance provides a cash injection if the business loses someone vital to their continued success. The amount a key person should be insured against can depend on the profit they generate, or costs associated with recruitment and training of a new employee.
Shareholder protection allows a company to retain control of shares if a partner passes away or suffers a serious illness, otherwise shares could pass to the deceased’s estate with the family owning the shares. A business could easily find itself with a shareholder who is unable to make a valid contribution or has a detrimental presence. By having share protection the business can ensure it has the right, and the funds available, to purchase shares should the worst happen.
A product called relevant life cover is also a form of business protection. It provides a tax-efficient form of death-in-service benefit for employees and salaried directors.
2. Look at critical illness cover and income protection as well as life cover. “People are much more likely to suffer a serious illness during their working life than pass away,” according to Tom Conner, of specialist adviser Drewberry Insurance, “so this is arguably the greater risk to a business.” Key person cover can be taken out in various forms, including critical illness, which pays out a lump sum upon diagnosis of a covered illness, or income protection, which pays a monthly income if the insured is unable to work due to ill health or accident.
3. Ensure the policy is written in trust. A business protection plan must be written in trust to ensure it is paid to the intended beneficiaries, and for life cover, is not included as part of the deceased’s estate for tax purposes. Writing policies in trust is free and should be done when the policy is taken out.
4. Check the tax implications before you buy. The premiums or benefit could be taxable or eligible for tax relief. Some policies are treated as an allowable business expense, which qualifies for relief on Income Tax, Corporation Tax and National Insurance.
5. Seek specialist advice. SMEs are nearly three times as likely to ask friends or family for advice, rather than consult a financial adviser, according to Aviva. Tom Baigrie of protection adviser LifeSearch said “A specialist financial adviser can help guide you to the most suitable policy for your company’s needs, and can often access products that may not be available otherwise.”