What is business protection?
Business protection insurance refers to a set of insurance policies designed to shield businesses from financial risks that could arise due to the loss or absence of key individuals in the organisation.
These individuals may include shareholders, directors or key employees. The purpose of business protection insurance is to provide financial support to the business during challenging times, ensuring continued operation and profitability.
Why is business protection insurance important?
Businesses face a variety of risks, and the sudden loss of a key person or a major shareholder can have a profound impact on operations and financial stability. Business protection insurance helps mitigate these risks by providing financial assistance to address various challenges, such as finding a replacement for a key person, buying out shares from deceased shareholders or paying off business loans in case of unforeseen events.
The Key Advantages of Business Protection Insurance
1. Financial Security
Business protection insurance ensures that your business has the financial means to weather unexpected events, thereby minimising disruptions and maintaining stability.
2. Continuity
In the event of a key individual’s death or incapacitation, the insurance payout can support the transition and continuity of business operations.
3. Credibility
Having business protection coverage can enhance your business’s credibility in the eyes of investors, lenders and partners by showing that you have a risk management strategy in place.
4. Shareholder Confidence
Shareholders and partners can be assured that their interests are protected, and the business can continue functioning smoothly.
Types of Business Protection Insurance Policies
Relevant Life Insurance
Relevant life insurance is a tax-efficient policy a company can offer its employees as part of their benefits package. In the event of an employee’s death, the policy provides a lump sum payout to beneficiaries.
Shareholder Protection Insurance
Shareholder protection insurance safeguards a business in the event of the death of a shareholder. It enables the remaining shareholders to purchase the deceased shareholder’s shares, ensuring business continuity and preventing unwanted third-party involvement.
Business Loan Protection Insurance
Business loan protection insurance ensures that outstanding business loans or debts can be repaid if a key individual responsible for the loan repayment passes away or becomes critically ill.
Key Person Insurance
Key person insurance protects a business from the financial impact of losing a key employee due to death or critical illness. The policy provides a payout that can be used to recruit and train a replacement, cover lost profits or repay debts.
Executive Income Protection
This income protection policy pays a monthly benefit to the business if you or one of your employees is unable to work due to illness or injury. It is a tax-efficient way to secure your income and can include spousal dividends (because a company’s profits may drop in the absence of a director if a spouse takes a dividend, this arrangement may also be impacted; hence, the director and the spouse can be protected under this policy).
Product Definitions
The table below offers concise definitions of the four primary insurance policies that fall within the scope of business protection:
| Insurance Type | Definition | Insured Parties | Coverage Benefits |
|---|---|---|---|
| Relevant Life Policy | A Relevant Life Plan offers a cost-effective way for an employer to arrange term assurance on the lives of employees, including directors. | The employee is the life-assured, with the business as the policy owner. | Relevant Life Plans allow you to provide employees (including directors) with tax-efficient death-in-service benefits without the need for, or alongside, a pension scheme. |
| Shareholder Protection Policy | This life insurance is purchased by businesses to ensure the availability of funds for buying shares if an owner or shareholder passes away. Optional critical illness coverage can be included. | Business owners and shareholders | The remaining owners receive proceeds to acquire shares from the deceased’s estate at a fair value, allowing business control to be maintained. |
| Business Loan Protection | This insurance is purchased by businesses to cover their debts in case the person or people responsible for a debt passes away. It may include an option for critical illness coverage. | Individuals responsible for the debt, often the business owner or a partner/director | The business is safeguarded; the payout aids in repaying business debts during challenging times. |
| Key Person Insurance | Businesses take out this life insurance to secure funds for staff replacement and to offset lost income during transitional phases. Optional critical illness coverage can be included. | Any crucial employee, such as a business owner, director, CEO, finance head, top salesperson or technology lead. | The business benefits by having resources to hire a suitable replacement or recover lost profits. |
| Executive Income Protection | Through the business, business owners take out this policy on either their lives or those of individual employees, allowing a monthly benefit to be paid to the employer in the event of illness or injury. | Business owners or employees. | For employees: – Not classed as taxable remuneration – Premiums not deemed to be a P11D benefit in kind – Can cover dividends and spousal dividend – Can cover employer’s pension contribution For employers: – Allowable business expense – Corporation tax-deductible. |
How do we help identify the right business protection policies for your business?
Assessing Your Business Needs
We support you in identifying the key individuals in your organisation whose absence could have a significant impact on the business’s operations and financial stability. These may include founders, top executives, key technical experts and major shareholders.
Determining Coverage Amounts
We calculate the appropriate coverage amount for each policy based on the potential financial impact of losing the covered individual. We factor in costs such as recruitment, training, lost profits, loan repayments and buyout agreements.
Comparing Insurance Providers
We research and compare insurance providers and choose the one that fits your business’s requirements.
Policy Customisation
We customise each policy according to your business’s unique needs and circumstances. Our tailored illustrations outline coverage amounts, policy terms and additional features to align with your risk management strategy.
Claiming Business Protection Insurance
In the event of a covered individual’s death or critical illness, you will be required to notify the insurance provider promptly. The provider will guide you through the claims process and furnish the necessary forms and instructions.
You may be required to submit documentation, such as medical reports, death certificates and policy information. All information provided will need to be accurate and complete to expedite the claims process.
The insurance provider will then review the submitted documents and assess the validity of the claim. Once the claim is approved, a payout will be made to the beneficiaries or the business, as specified in the policy.
Frequently Asked Questions
Can sole traders benefit from business protection insurance?
Yes, sole traders can benefit from relevant life insurance and key person insurance to protect their businesses and families.
How are premiums calculated for business protection insurance?
Premiums are determined based on factors such as the insured individual’s age and health, the coverage amount, the policy type and the level of risk associated with the business.
Can I adjust coverage amounts in the future?
Yes, coverage amounts can often be adjusted as your business evolves. Keep your insurance adviser informed about any changes that may affect your coverage needs.
Is business protection insurance tax-deductible?
Premiums for business protection insurance policies are typically tax-deductible as business expenses. However, tax regulations may vary, so it’s advisable to consult with a tax professional.
Are there waiting periods before a claim can be made?
Waiting periods, known as the initial exclusion period, may apply to certain critical illnesses. These periods vary among insurance providers and policies.
Business protection insurance is an essential aspect of risk management that can provide much-needed financial support during challenging times. By understanding the types of policies available and selecting the right coverage for your business, you can ensure continuity, stability and peace of mind for both yourself and your stakeholders.
Please do not hesitate to get in touch to arrange a consultation with an experienced protection insurance adviser to design a business protection strategy that aligns with your specific needs and goals.
Please note: This article acts as a guide and does not provide financial advice. Please also note that these plans have no cash-in value at any time and will cease at the end of the term. If premiums are not maintained, then cover will lapse. Plans may not cover all the definitions of a critical illness. The definitions vary between product providers and will be described in the key features and policy document if you go ahead with a plan.
