Business Protection

Key Person Cover

Most businesses have taken appropriate steps to protect themselves from risks such as fire, theft, accidents and claims under employment law, but often ignored are the risks associated with the loss of a key individual. It is often the case that certain individuals within a business are crucial to its success which might include:

• Individuals who had the original business idea.
• Someone who has specific technical or product knowledge.
• A person who has key contacts or business relationships.
• Someone who has particular skills in navigating regulation.
• Maybe they are a genius with your back-office and IT systems or perhaps they developed them.
• They could be the person who knows exactly how your business functions on a day-to-day basis, keeping all those plates spinning, and you’d be lost without them

Whoever the key individuals are and whatever their role within the business, it is often the case that the business will suffer financially if they were to die or be seriously incapacitated.

The effect on the business could be felt in a number of ways but most often it is in the form of a loss of profits caused by short-term disruption to business-as-usual activities. There might also be additional costs associated with the recruitment of a replacement or taking on temporary staff to plug the gap and to get the right individual with the skillset you need might mean paying above market, especially where skills are specialised or in demand.

Fortunately, is possible to cover the risk associated with such a loss. A simple life assurance or critical illness policy, where the employer is the beneficiary in the event of death or serious incapacity could help the business meet the short- term financial challenges. Life assurance cover costs relatively little and subject to the health of the key individual is pretty simple to arrange.

Relevant Life Cover

Relevant Life policies offer companies the ability to put in place Life Assurance Benefits for both employees and Directors in a tax efficient way. Benefits can be set up based on a multiple of earned income and for shareholding directors, this can include benefits in kind and dividends paid. These are extremely tax-efficient policies. The policy is taken out by the company on the life of the individual and the benefit is payable under trust to their family. Distinct from personal life assurance cover, these polies offer:

• Corporation Tax Relief on premiums paid by the employer.
• Does not count towards lifetime allowance (unlike pension benefits or Death in Service).
• No employee tax or national insurance on premiums paid.
• Benefit paid free of Inheritance Tax to employee’s family.

Shareholder / Partnership Cover

The death or diagnosis of a critical illness of a Director or Partner can put huge strain on a business and not just in a financial sense. It is not uncommon and recent statistical evidence suggests that in a business with four Directors/Partners aged 40, there is a 24% chance of one of them dying before reaching age 65 and a 74% chance of one of them suffering from a critical illness.

The financial strain might take the form of loss of profits leading to cash flow problems and potential issues with lenders or simply additional costs in terms of recruiting a suitable replacement to the business. However, one key issue that many businesses miss is how the death will be dealt with in terms of the ownership of the share of the business belonging to the deceased.

The death or incapacity of a Shareholder/Partner affects two groups. The family of the individual and the ongoing shareholders/partners.

Planning in advance can address the concerns of both sides. Putting life assurance and/or critical illness cover in place means that in the event of the loss of one of the Directors/Partners, money is made available quickly to those remaining. They can use this to hire replacement staff or outsource work to third parties, such as accountants, and importantly, they will also have funds to ensure the family of the deceased can receive money for their share of the business.