In the fast-paced world of business, safeguarding success is paramount. For entrepreneurs and limited company directors, ensuring the longevity of your ventures involves more than just ambition—it requires strategic protection.
Business Protection isn’t just a safety net; it’s your shield against unforeseen challenges, safeguarding not only your profits but also your people.
Why do I need financial protection?
Business Protection is essential for safeguarding the financial stability and continuity of your enterprise. It serves as a safety net against unforeseen events such as the illness, injury, or death of key personnel. Without adequate protection, your business may face significant financial strain, operational disruptions, and potential collapse.
What different forms are suitable for my business?
There are two main categories of protection: individual-focused and business-focused.
Individual-focused protection includes Executive Income Protection and Relevant Life cover. These options provide financial support to the individual and their family in times of need, such as covering lost income due to illness or death.
Business-focused protection, or ‘pure’ business protection, includes Shareholder/Key Person/Business loan cover. These forms of protection aim to bolster the financial resources of the business to alleviate the immediate and long-term impact of losing a pivotal member due to illness or death.
Determining what cover you require
- If a key person within the business were diagnosed with a critical illness or died, how would the business cope?
- Who is responsible for the 4 key business functions: Leadership, production of services or goods, financial control, sales, and marketing?
- Which other business functions are vital for the success of the company? Such as someone being head of a department or specially qualified for a certain role.
- Could the business afford to recruit a replacement for the individual no longer contributing to the profit of the business through death or injury?
- How much turnover or gross profit do the key people contribute?
- If gross profits fell, would the business be able to meet its fixed costs?
- Would the company be able to pay its loans?
- If a shareholder died, what would the estate want to do with the shares?
What solutions are available?
Executive Income Protection is a tax-efficient solution for limited company directors or employees, providing income protection funded through the company. It covers up to 80% of remuneration, including spousal dividends, and can include employer National Insurance and/or pension contributions. This policy can increase with inflation to maintain its value and is often tax-deductible for the employer. Additionally, it offers benefits such as business legal advice, tax and VAT advice, and doctor’s services for the claimant’s benefit.
Relevant Life Cover offers tax-efficient life insurance for limited company directors or employees, providing a lump sum to their family or chosen beneficiary upon death. It’s advantageous for small businesses without group schemes, with premiums typically being tax-deductible for the business. The benefit paid is non-taxable and exempt from inheritance tax, without affecting annual or lifetime pension allowances.
Shareholder Cover minimises business disruption if a shareholder dies, providing funds to buy back shares based on the shareholder agreement and memorandum.
Key Person Cover protects businesses from the financial impact of a key person’s critical illness or death, covering costs like replacing expertise and ongoing projects. Coverage is tailored to the key person’s salary or contribution.
Business Loan Cover repays business loans in case of the responsible person’s death or critical illness. Partners can take out cover and place it in trust for each other, while sole traders can secure coverage for their families to settle outstanding loans.
What potential risks are you exposed to without adequate protection?
- Loss of profits due to a key person’s prolonged illness can lead to additional costs such as funding sick pay, covering replacement expenses, and compensating for lost income. Without adequate protection, such as insurance for the key person or the director themselves if they are pivotal to the business’s profits, the financial impact on the business can be significant.
- Spouses of shareholders may find themselves responsible for shares in a company in which they have had minimal involvement. This lack of engagement can pose risks to both the business and the spouse, highlighting the importance of proper protection measures.
- Business loans can become a heavy burden on the business if the individuals responsible for repayment suffer from ill health or pass away. Without adequate protection in place, the financial strain on the business could be severe and potentially threaten its operations.
- Ongoing sick pay for a Ltd Company director, particularly if they are unwell for an extended period, not only adds to the company’s expenses but also diminishes their contribution to profits due to their absence. This underscores the necessity of protection strategies to mitigate the financial impact of such scenarios.
Understanding available protection options and assessing your business’s needs to mitigate risks from unforeseen events like illness or death of key personnel is essential. Without adequate protection, financial strain, operational disruptions, and potential collapse loom. Tailored protection strategies are crucial for safeguarding profits and people in entrepreneurship.
For support in determining the strategy that best fits the needs of you and your business, the team at Henry Dannell is here to provide expert advice and tailored solutions.
Please note: This is for educational and informational purposes only. While efforts have been made to ensure accuracy, it is not financial, legal, or professional advice. Readers should seek appropriate professional advice before making decisions based on this information.
Individuals and businesses are strongly advised to consult qualified professionals to assess their specific needs before making decisions regarding protection provisions or insurance options.
