Business Protection – Your Guide
We are going back to basics with business protection and having an in-depth discussion on what this is, how it works, and why it seems to be an overlooked area within the financial sector.
Why do you think business protection is overlooked?
There are so many elements to it, so it seems very complicated. There are so many policies within each category, and then advisers that aren’t experienced in it probably find it complicated. Business owners probably think it’s complicated too.
However, with there being so many elements to it, it does make it easier. It means you can take a policy that is much more bespoke to your business. To just look at it online, is overwhelming because it does cover the main elements, and within that, you’ve got so many policies that might be irrelevant to your business.
A lot of the information seems to suggest that most business protection policies are normally taken out through an adviser. It’s probably whilst you’re doing something else or starting something else out, and it’s more likely that people are sorting their commercial mortgages out on their business premises. Or, maybe they’re sorting out their mortgage on their home.
That’s when it comes about, and it’s much more simple than you think. It’s a similar process for sorting a mortgage.
It’s the same process of understanding and sitting down with an adviser, and finding out about the company, rather than the individual, isn’t it?
Yes. If you’ve taken out a mortgage before or done some sort of protection policy, you’ve started the process with a mortgage adviser without even realising it.
The main questions an adviser would generally need to know about your business is for example, “what is your role in the business?”, “Have you got any of the shareholders or directors in the company?”, “Do you have any current business debts” and a key question would be, “what would stop you from being able to trade as normal?” That’s the main topic of the discussion you’ll get from a start-up meeting.
What is business protection and what are the different types of cover?
There’s a range of policy options that are out there to help business owners ensure that they’ve got financial security and to plan for the unexpected. Also, so their business can continue to operate with as minimal disruption as possible.
Like we’ve seen with Covid19, life can throw a massive curveball at any time. People fall ill and have to take time off work. Unfortunately, people pass away and some company structures have to change because of that.
There are four main elements:
- Key Person Cover – This is to safeguard your business against the loss of a key person that’s employed.
- Business Loan Protection – This will help you with any outstanding business overdrafts, possibly any business loans you might have, and even a commercial mortgage on your business premises. This would help you with the loss of a guarantor for any of those.
- Relevant Life Plan – This is going to provide your life cover for an employee, which can also include your directors as well.
- Share Protection – This is going to help your shareholders, partners, directors by a deceased person, the share of the business if something were to happen to one of the other shareholders.
These are the four main elements, and then you’ve got different policies within it, depending on your business setup.
In more detail, what is ‘key person cover’?
This essentially helps to protect your business if an important employee dies or suffers from a critical illness. The money from the policy is paid directly to the company or the partners, and that’s to help them to continue to trade as normally as possible. Key person cover is going to differ for every single business. It’s likely going to be any member of staff that you’ve got who has a direct impact on the profits of your business.
This could be a director, it could be you as the director or it could be a particular salesperson. It could be a senior account manager that’s bringing you in the most money. Maybe it’s an employee you’ve got in IT, who’s the only person that knows how to run your business software. If that software was to go down, it would be detrimental to your business. So, it could be that it’s somebody with just specialist skills or expertise that you want to treat as a key person.
Can you add a critical illness cover element to it?
This is firstly going to protect your profits. If something happens to a member of staff, chances are you are going to have a loss in profits, while you’re going through the destruction of losing a member of staff.
It might be that you’ve then got recruitment costs to get a replacement. Or, it might even be they are just off sick, and perhaps off for a significant amount of time and you’ve got sick pay costs to cover. Also, it’s going to protect your debts. If you’ve got business overdrafts, any business loans, it can help with that as well.
It can also help sole traders if they’re personally liable for any business debt. If they die, the business debt could be inherited by the next of kin, and that’s something you probably won’t want to happen.
In more detail, what is a relevant life plan?
Relevant life cover allows you as an employer to provide a death in service to your employees. It’s essentially a tax-efficient life insurance policy and it pays out a tax-free lump sum on the death of the insured person. It’s paid out to the employee’s family or any of their financial dependents. The main benefit of this is that the premiums are guaranteed and they can be paid monthly as well.
Unlike the other group schemes that you can get on the market, it does count as a tax-deductible business expense. Plus, the benefits of this are usually free from inheritance tax as well. This means the employee’s family, and dependents, are not going to have to pay inheritance tax on that. A relevant life plan is not normally a cover you would take out as a sole trader, but it can be set up by a PAYE employee of a sole trader.
If you are a sole trader, you’re probably more likely to take out a personal protection policy for something like this. It’s arranged on an individual life with the employer, as the policyholder.
Generally, the employer chooses the amount of coverage that you get. They normally do it as a multiple of your employee’s salary. For example, it might be that the employees on a 20 grand basic and maybe the relevant life cover would pay out three times the annual salary. So, the payout would be 60 grand.
Who is this geared for? What kind of business?
Directors of limited companies can also take it. They can set it up on their own life as well as the life of another. There are two different ways you can pay or take it out. Small to medium companies can take this out, and even larger companies, that haven’t got a group death in service benefit already.
To sum this all up. The relevant life plan is paid for by the company and they will have the nominated beneficiary. If anything happens to that employee, then a tax-free lump sum goes to that employee’s family. It also benefits the families because it’s usually free from inheritance tax and also benefits the beneficiary from a tax point of view too.
Relevant life plans tend to be small businesses or small or medium ones that take those plans out.
If you’re a director of a limited company, why would you not have a relevant life plan, rather than a personal protection plan?
It completely depends on your business and how your business is set up. They’re other policies that might be more suitable for you, but if you haven’t got anything in place, it’s worth looking into it. Especially to see if you can be eligible for a decent life cover.
If you’ve got a personal life insurance policy and you’re a director, it’s better to do it as a relevant life plan because the firm will pay and it saves on your corporation tax. It’s written off as a company expense and that’s a big benefit, that a lot of business owners are not aware of.
What are the taxation benefits with regards to business protection?
It’s always recommended you speak to a tax adviser, especially when you know what business protection policies you’re thinking of taking out. It’s going to be different for each business. It depends on your setup and how it’s working for you. In some cases, you’re going to get tax relief on premiums for key person protection, and on your relevant life policies.
It’s a tax-deductible expense, and it’s going to be usually free from inheritance tax as well as beneficiaries. Treat it like an add-on. Look to see what your business needs are first, make sure you’re getting the right protection for you, and then it’s a bonus if you’re going to get some sort of tax relief from that as well. It will be different for every business, depending on what your tax situation is going to be like.
Speaking to a tax adviser is always advised, so you’re aware of what you’d be eligible for.
What companies provide business protection?
Well-known and trusted companies include, for example, Zurich, Legal and General, and Liverpool Victoria (LV). There’s a lot of mainstream protection providers out there that will be able to help your business protection.
You might also have your car insurance with them. You might already have something with them without realising it. Most of them offer business protection now.
So, a mortgage broker will sit down and understand the director’s needs. Understand the firm’s needs, and from there makes the right recommendations based on those needs. Whether it be LV, Aviva, or any other provider on the market, in the same way as you would do with any personal protection or any mortgage protection.
A summary of business protection:
- Options – There’s a range of policies available to suit your different business setups. Whether you are a sole trader, a traditional partnership, a limited company, or a limited liability partnership. There are lots of options out there to help all of those types of business setups. If you haven’t got anything in place or you’ve got something, but you’re now thinking there might be something better, it’s always worth reviewing as well.
- Reevaluating – You can have staff changes, and restructures within your business so It might be that you need to readdress what you’ve got in place already.
- No costs – It’s not going to cost you and you’ve got nothing to lose. It’s not going to cost you anything for any meetings or chats that you have to get set up. Initially, there’s no cost. The only cost you’re going to have is the monthly premiums once the policies are in place.