Matt Cotter talks all about business protection.
Why would a business need to take out Life Insurances and does my company need them?
There are many reasons why a company may want to take out some protection. It might be, for example, to protect the business from loss of profits. It might be to offer benefits to their employees, such as a death in service or significant illness cover. You might want to cover business loans, or ensure the business continues to trade in the event of a shareholder passing away.
There are so many different factors that you’d need to consider when taking out business protection, and it will depend on what you’d want to offer to employees and what the buiness priorities are.
What is a Relevant Life Plan?
It’s generally the most common type of business insurance. This might be something a business considers if they want to offer a death in service benefit to their employees. This way the individual employees won’t pay for their cover, but it would still benefit the employee’s family if they were to pass away.
A business owner might also want to take relevant life cover on themselves, so that if they pass away, money would be paid out to the family, essentially like having personal cover, but it would be written through the business.
What is Key Person Insurance?
Key Person cover is generally to protect the business from loss of profits. A business may, for example, have a particular salesperson that generates most of the business and therefore profits. If something were to happen to that salesperson, it’s safe to say the business is likely to lose out, either through profits or the cost to hire and train somebody.
You’re able to actually take out some protection to protect your business against the loss of a key person, such as a salesperson. If a company loses somebody turning over £100,000 per year, for example, Key Person cover would reimburse the business with a cash lump sum to replace that person, or at least have some money whilst that person recovers and returns to work.
How does Shareholder Protection differ?
It will depend on the situation and setup within a business, but what you’ll find with Shareholder Protection is that people that are looking to take this out might be somebody who perhaps has a partnership and holds 50% shares in the business. If something happens to one of those shareholders, half of the business would be owned by somebody who perhaps isn’t able to operate within the business or has passed away.
What you need to do in this sort of scenario is to make sure that there’s some kind of provision in place to ensure the remaining shareholder(s) are able to buy those remaining shares off that person who perhaps can’t do the job anymore. If they’ve passed away and the shares were passed to their family, again the protection would make sure that they would be able to purchase them off the family.
There are different ways of doing this, with terms of legal agreements, single option agreement, cross-option agreement, but the gist of it is to make sure that business can continue trading and distribute the shares fairly if something were to happen.
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What is Business Loan Protection?
What you’re doing with Business Loan Protection is making sure that when a loan is taken against the business, or an individual who’s a shareholder within the business, if something were to happen, that loan could still be repaid. This protects the remaining shareholders who perhaps never took the loan in the first place, or just wouldn’t personally have the funds to repay the loan.
If you take on a large debt such as a mortgage, you’d want to make sure you could pay it off if you passed away. The same would apply to a business loan which you had perhaps used for a commercial property or stock purchase.
How much cover do I need?
It’s the same as cover taken out on a personal basis, we’d assess the situation. You would need to consider what sort of impact it would have within the business, for example, if they were to lose a key person, or if something happened to a major shareholder within the company.
Different cover types are also calculated differently, for example, if we are looking at Key Person Cover, we’d need to calculate the sort of profit that, that person brings in and the loss of profits that the business would incur if something happened to that person. It can be quite a difficult process to work it out, but, of course, that’s why we’re here.
What costs are involved when it comes to business protection?
It’s going to depend on the level of cover that a person needs and what types that their business needs. If it’s just a simple relevant life plan, this will be a lot more cost effective than setting up cover against shareholders, key people and loans.
The good news for all those people looking to arrange some Business Protection is there may be savings on tax to be had. With a Life Insurance plan, the business is the owner and not the individual, and therefore the premiums of the policy comes out of the business pre tax. It’s very complicated, but there are tools which I can use to clearly show somebody the sort of savings they would make writing an insurance policy personally as they would to writing it through the business. Typical savings are 20-40% of the overall cost.
What are the key benefits of Business Protection?
The key benefit is making sure your business can continue to operate and function in certain unfortunate events. You also get such good savings on tax, especially the higher the premiums are, as generally you’ll see higher savings. The other benefit is to ensure the business is not losing profits.
If anybody listening thinks they could have a conversation about what’s available and the different ways you can protect your business just give me a call or send me an email.
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