Taking out an insurance policy on the life of your business partner almost sounds like the start of a plot for a Midsomer Murders story. But insuring the life of someone with whom you run a business or who is a key employee is sensible financial planning, and it can help to avoid unfortunate plot twists with your company.
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.
At the start of 2019 there were over 5.9 million private businesses in the UK, 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.
Business Loan Protection
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.
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 of 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.
To find out more information about business insurance and to find out in more detail how these policies work and what they can provide, call Furnley House on 0116 269 6311 or email firstname.lastname@example.org. We have a team of highly skilled financial advisers who are experienced in working with companies of all sizes with their business and employee financial planning needs.
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