Businesses are built on people
Most businesses buy insurance to cover the things they consider vital to business continuity such as a building, their stock and their equipment. But for many businesses, their most vital asset is their people. The financial success of your business relies, more than anything on the unique skills, drive and knowledge that business owners, directors and key people can bring. Losing them could lead to a prolonged period of reduced income. And unlike a photocopier, replacing a key member of the business may not be easy.
What is Business Protection?
Business protection insurance is a way of helping business owners protect against possible financial losses when serious illness or death affects them or their employees. It can help ensure that the business survives and continues trading under seriously challenging circumstances.
Why insure a business against the loss of its owners or key people?
Loss of Profit
The sudden loss of a director or key employee can place a business at risk financially. It could lead to a drop in sales or delay planned developments while a loss of specialist skills can bring a prolonged period of reduced profits. Key person protection might help a business to weather the storm.
Many lenders make specific conditions for immediate repayment of business loans on the death of a key person or business co-owner. Business loan protection could help a client ensure they can meet their liabilities if the loss of a key person or guarantor means they’re struggling financially.
If your client loses a business partner, they might have to dispose of assets to pay their beneficiaries for the partner’s share of the business and keep ownership under control. Partnership protection provides your client with the funds to secure business ownership and its ongoing direction.
Share Purchase Protection
What is share purchase protection?
If one of the business owners were to die or become either terminally or critically ill, share purchase protection insurance could give the remaining business owners enough money to buy the insured partner’s or the shareholder’s interest in the business. Share purchase protection gives a business’s owners the financial reassurance they need to keep the business on track during an unsettling period for the owners.
What is Business Protection?
Share Purchase Protection Case Study.
Joan Simmons is one of three shareholding directors of the Mistro Research Company. The company is worth £1.2 million and each director owns a third of the shares in the business. Joan was only 50 years of age when she suffered a severe stroke, but made a full recovery within six months.
A critical illness claim was submitted to Joan’s insurer, who paid the claim shortly after receiving a medical report from Joan’s neurosurgeon. Proceeds of the claim were payable to the business trust and held by the trustees for the other two shareholding directors.
After making a full recovery, Joan decided she would like to sell her shareholding in the business but agreed to be employed by the firm on a part-time consultancy basis. The two remaining shareholders purchased Joan’s share of the business with the £400,000 from the business trust and each became 50% shareholders of the business.
Without shareholder protection
Joan may not have been able to sell her shares to the other shareholders if a shareholder protection arrangement had not been put in place. She may have been forced to retain them and continue to deal with the pressures of business ownership. Alternatively, she could have sold her shares to the highest bidder which may not have been with the approval of the remaining two shareholders.
What is key person protection?
Key person protection allows a business to insure against the financial loss it may suffer if a key employee (also referred to as a ‘key person’) dies, is terminally ill or suffers a critical illness. A key person is an individual whose skill, knowledge, experience or leadership contributes significantly to the company’s continued financial success.
Insurance can be bought in order to financially protect a business against the death or serious illness of a key person. You or your business will be the policy owner. The key person is the life assured. The business is protected and receives the proceeds of any claim.
Key Person Case Study
Jim Bailey is the Sales Director of EZE Electronics. He has been with EZE for five years. He has established a network of industry contacts and built strong business relationships with five of EZE’s largest customers. He is essential to the success of the business and has a salary of £130,000 per annum as well as a bonus of up to 50% of salary, dependent upon sales targets being met. Sadly, and unexpectedly, Jim suffers a serious heart attack and dies.
With key person protection in place
Two years ago, EZE took out key person cover on Jim for a death benefit worth £700,000, based on a maximum of five times Jim’s salary plus annual bonuses. The policy was short-term insurance lasting five years, and cost a premium of £50 per month. EZE took out the key person insurance to cover any potential loss of profit caused by the loss of Jim through serious illness or death, and to contribute towards the cost of recruiting a suitable replacement. In addition, EZE also arranged ‘death in service’ benefits and a pension for Jim’s wife and two children.
Without key person protection
Although the company was in a healthy trading position, the loss of Jim resulted in an estimated fall of 20% in profits for the financial year in which he died and put the company financial position at risk, significantly reducing the amount of share dividend to the shareholders.
What is business loan protection?
Business loan protection is a life insurance or life and critical illness policy, usually taken out by the business to insure the loan. You can choose to set up the insurance to decrease in value as the capital debt decreases too. When a valid business loan protection claim is made, the amount claimed or sum assured is paid to either the business or directly to the lender.
If your business has outstanding borrowings such as a loan, commercial mortgage or a director’s loan, then business loan protection can help repay these if the individual covered should die or suffer a critical illness.
Loan Protection Case Study
John Wilson is the managing director and driving force behind a company supplying parts to the aerospace industry. He is one of three shareholders. He is looking to negotiate a bank loan of £1 million for new machinery, to increase the company’s production of aircraft navigational equipment for UK and overseas customers.
The bank has agreed to lend £1million to the business over a period of five years on an interest-only basis. However, a vital part of the loan agreement is that the loan must be immediately repaid if John were to die during the loan period. The business agreed to the terms of the loan and the loan was completed and the machinery purchased. Sadly, John was involved in a serious car accident 12 months later and died shortly afterwards.
With business loan protection in place:
A few days after the loan was agreed, John was advised to take out £1 million in loan protection by the firm’s financial adviser, for a term of five years at a monthly cost of £60 per month. On John’s death, proceeds of the life insurance or term assurance claim were paid directly to the business. The finance director immediately arranged for the funds to repay the outstanding loan in full.
Without business loan protection:
Had the business not taken out loan protection they would have been required to repay the loan immediately from their existing funds. The firm had insufficient liquid capital to make an immediate repayment and would have been forced to sell some of its assets. This could have forced the aerospace business to sell some of its assets at below the market value, which could then have resulted in a restructuring and/or downsizing of the business.
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