Business protection is all about insuring for the unexpected. It’s a way of protecting your business if something goes wrong.
Providing Business Protection Insurance and Advice
It’s important to prepare for the unexpected, especially if you’re a business owner. As a team of experienced property and mortgage advisors, we ensure that you have the right level of business protection. From key person insurance to partnership protection, we provide an expansive array of options that are sure to suit your needs, as ultimately, we’re here to help you save money! Call our team to arrange a consultation, or read on for more details about each insurance option.
Key Person Insurance
Key person insurance is an important form of business insurance. There is no legal definition for “key person insurance”.
In general, it can be described as an insurance policy taken out by a small or medium-sized business, that protects that business from potential financial losses that could arise from the death or extended incapacity of the member of the business specified on the policy. The policy’s term does not extend beyond the period of the key person’s usefulness to the business.
The aim is also to help protect the profits and facilitate business continuity. Key person insurance does not indemnify the actual losses incurred, but provides a fixed monetary sum as specified on the insurance policy. This is given upon the insured person either dying or suffering a critical illness as defined in the
insurance policy terms and conditions.
An employer may take out a key person insurance policy on the life or health of any employee whose knowledge, work, or overall contribution is considered uniquely valuable to the company. The employer does this to offset the costs (such as hiring temporary help or recruiting a successor) and losses (such as a decreased ability to transact business until successors are trained) which the employer is likely to suffer in the event of the loss of a key person.
Becoming a Key Person
A key person can be anyone directly associated with the business, whose loss may cause financial strain to the business. For example, the person could be a director of the company, a partner, a key sales person, key project manager, or someone with specific skills or knowledge which is especially valuable to the company.
Based on a set of principles laid down in 1944 by the then Chancellor of the Exchequer, Sir John Anderson, the premiums paid will be allowed as a business expense for corporation tax purposes provided the following are met.
- The only relationship between the proposer and the life assured is that of employer and employee (except in the case of shareholding directors).
- The plan is designed to cover loss of profits only.
- The term of the insurance is reasonable – A 5-year term is normally acceptable, but some local inspectors will allow up to 10 years.
- The employee does not hold a significant shareholding (less than 5% is probably insignificant).
If the premium is a permitted allowable expense, then the policy proceeds would normally be subject to taxation. However, there are no hard and fast rules regarding the tax treatment of premiums and benefits, and each case should be referred to the local Inspector of taxes for approval before the policy is implemented.
It is not the case that if the business decides not to apply for tax relief on the premiums, any proceeds will necessarily be tax-free. The taxation decisions rest with the inland revenue, and there are reported cases where the revenue has taxed benefits on which the premiums did not obtain tax relief.
However, such policy proceeds should usually escape tax, unless the proceeds are payable in instalments. As above, each case should be referred to the local inspector of taxes for approval before the policy is implemented. It is therefore very important that the effects of taxation should be considered when setting the sum assured on key person cases.
These types of plan will 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. Information regarding taxation levels and basis of reliefs are dependent on current legislation and individual circumstances, are not guaranteed and may be subject to change.
Please Note: This plan will 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. The policy may not cover all definitions of a critical illness. For definitions of illnesses covered please refer to your policy documents.
The Value of Protecting Your Partnership
One of the great risks of a business partnership is that one of your colleagues may die, with his or her share of the business passing to someone else. That person may have little interest in the business or – at worst – may be hostile to your objectives. Equally, a partner who suffers a serious illness may want to retain the option of continuing in the business, or be compensated for their exit from the business.
The safety net is a pre-arranged scheme to ensure the surviving partners have enough funds to buy out the interest in the business, or compensate the deceased’s dependants. The following range of options should be considered:
- Appropriate life cover to fund the purchase of the deceased’s interest in the business.
- Advice on a suitable agreement to ensure the partnership continues and the deceased’s dependants are compensated.
- Arrangements for partners who retire, or who fall seriously ill and are unable to work.
Benefits to Partners
In the event of the death or serious illness of one of your partners, you’ll want to ensure that the business continues as smoothly as possible. Partnership protection sets out the procedures and policies to help you retain control:
- Agreements, insurance, and trusts can be established to protect the business against the financial and practical implications of a partner’s death or specified critical illness.
- Arrangements which can help to ensure your partnership is not automatically dissolved.
- Helps to protect your business interests against hostile parties, or disinterested inheritors.
- Funds available to buy out the deceased’s interest in the business at fair market value.
- Continuity of business prosperity.
- Avoid the sale of assets to repay the departed partner’s interest in the business.
- Help retain confidence of employees and customers.
Relevant Life Plan
Please Note: This plan will 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. The policy may not cover all definitions of a critical illness. For definitions of illnesses covered, please refer to your key features and policy documents.
A Relevant Life Plan is a death-in-service benefit taken out by a company on behalf of an employee. This type of policy pays a lump sum if the employee dies during the term of their employment. Often, a relevant life plan also provides a pay-out if the employee is diagnosed with a terminal illness. It is important to note, however, that terminal illness claims will not be paid in the last 12 months of the policy.
What are the Main Benefits?
For the employer:
- The premiums may be treated as an allowable expense in calculating your tax liability.
- Unlike a registered group scheme, these policies have no effect on the amount of money you can contribute to or accumulate in your pension scheme.
For the employee:
Relevant life plan policies are often tax-efficient for high earners. This is because the premiums are paid by the company, meaning they are not usually liable to employee income tax. This is different from when employees pay through a company group scheme, where such a policy may be considered as a benefit in kind.
In addition, the benefits are, in most instances, paid free of inheritance tax – provided they are paid through a discretionary trust.
Who Are Relevant Life Plans Suitable For?
- Small businesses that have a small number of employees and do not qualify for group life schemes.
- High-earning employees or directors who have substantial pension fund savings. A relevant life plan means their death-in-service benefits do not impact their pension allowance.
- Members of group life schemes who want to top up their benefits beyond the scheme rules.
There are some individuals for whom relevant life plans are usually not suitable. They include the self-employed, equity partners, or members of limited liability partnerships.
Are there Limits to the Cover?
For the employee to qualify for the tax concessions, certain rules must be satisfied. These include the following:
- The cover must be paid in a single lump sum before the age of 75.
- Only death benefits can be provided.
- Benefits should be paid through a discretionary trust.
- Beneficiaries should be restricted to the employee’s family members and dependants.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
For many business owners, running a company is a time consuming and complex affair. Attention is rarely paid to what might happen if a shareholder dies, or becomes seriously ill. In the interests of financial security, business stability, and continuity – particularly for private limited companies where there may only be a small number of principal shareholders – it is essential to provide a safety net following the loss of a shareholder. This is due to the following:
- Shares may go to the deceased’s family, who may have little interest in the business and would prefer a cash sum.
- The other shareholders may want to retain control by buying lost shares – but may not have the resources to do so.
- The shares may be taken over by someone who does not share the company’s objectives – and may even be a competitor.
The correct insurance policy allows for sufficient funds to be available in the event of the death or a specified critical illness of a shareholder. This ensures that the company can continue to operate unhindered while the outgoing shareholder or their family receive fair compensation.
It provides documentation to enable the surviving shareholders to receive the funds free of tax under current legislation, tax year 2017/2018.
Benefits for Shareholders
In the event of a shareholder’s death or specified critical illness, one of the most important things to your business is to ensure continuity. Shareholder protection sets out the procedures and policies to help ensure that you retain control, and have the necessary funds to do so. It has the following benefits:
- Arrange for the most appropriate transfer of shares to surviving shareholders, or the company, at a fair commercial price.
- Set up insurance policies to provide the funds to purchase the shares.
- Avoid having to draw on funds set aside for other purposes.
- Prevent the sale of shares to hostile parties, or competitors.
- Documentation to enable all transactions to be made tax-efficiently.
- Help maintain business stability and continuity.
- Help retain the confidence of employees and customers.
The plan will 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. The policy may not cover all definitions of a critical illness. For definitions of illnesses covered, please refer to the key features and policy documents. Information regarding taxation levels and the basis of reliefs are dependent on current legislation and individual circumstances. They are not guaranteed and may be subject to change.
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