INSURING THE LIFE OF YOUR BUSINESS PARTNER; MAKE IT A JOB FOR JANUARY

Taking out an insurance policy on the life of your business partner is unlikely to be top of your list of January jobs. Yet insuring the life of someone with whom you run a business or who is a key employee is important in financial and legacy planning. It could be one of the most important steps you take to protect your business in 2023.

When a business is owned or run by more than one person, all sorts of complications can arise when one of the owners dies. The portion of the business they own will often be inherited by family members, and difficulties can arise when they want to sell their share and there is not enough money to buy them out. They may want to take an active role in the business which is not welcomed.

Similarly, the death or serious illness of a key person in a business, whose skill, knowledge, experience, or leadership contributes to the continued financial success of a company can be just as devastating.

According to the insurer Legal and General, 52% of businesses think that they would cease trading in under a year after the death or critical illness of a key person*. But this can be avoidable with a death or critical illness policy, where the employer is the beneficiary and funds can be used to cover the costs of replacing that essential worker.

There were 5.5 million private sector businesses in the UK at the start of 2022**, which is why insuring lives in the workplace is as mainstream as insuring lives in personal finance. There are four main insurance policy types which are designed to cover the range of corporate insurance needs:

Key Person Protection

A business can often have a person that is invaluable to its success. It can be a person with a unique skill set or a director, someone who is such a key person that a business would be profoundly impacted if they became seriously ill or died. Key Person Protection is designed to pay out a lump sum on the death of the insured person at any time during the length of the policy. The money can be used to help the business to recover from its employee loss, either helping to replace lost profits or towards finding and hiring a replacement.

Directors often need to take out an overdraft, loan, or commercial mortgage when they are growing their business. Usually, the terms of these loans mean that the debt has to be paid off on death. If the person who takes the loan dies or becomes critically ill, then Business Loan Protection policy will pay out an agreed sum of money to clear those loans. Policies can also pay out on a diagnosis of terminal illness, subject to individual policy definitions.

Share Protection

Few people start a business with a clear plan of what may happen if one of the business owners dies. But as a business grows in size and value, it can soon become a problem if that ‘what if’ question is not addressed.

Share Protection is an insurance policy that pays a business an agreed sum on the death or serious illness of a partner or director, providing the funds to buy out the share of the company owned by the deceased and to remain in control of the business.

Relevant Life Plan

Unlike Share Protection, a Relevant Life Plan is an insurance policy paid for by the business for an employee, such as a director of a company. It’s designed to pay a lump sum to the member of staff if they die or are diagnosed with a terminal illness, whilst they are employed. A Relevant Life Plan is paid for by the employer, so it offers a tax-efficient way to arrange life cover benefits. A Relevant Life plan can be used when a business is looking to provide ‘death in service’ benefits, but there aren’t enough staff in the company to set up a group scheme. It can also be used when Directors wish to arrange individual ‘death in service’ benefits for themselves, but don’t want to take out a scheme to cover all their staff.

This is a brief summary of the main features of insurance policies, but there is much more detail about the level of coverage and plans and policies will differ between insurance providers. In many cases, critical illness protection is an option that can be added on to a business insurance policy, which will increase the cost of premiums.

If premium payments are not maintained, the benefits of the plan will be put at risk. If premium payments cease altogether, the benefits of the plan will cease. The cover may be less than you need if you do not review it regularly.