Business protection is to support a range of businesses throughout the UK – from limited companies and partnerships, to sole traders and limited liability partnerships.
Business protection is to support private sector businesses, of which there are approximately 6 million in the UK. Of those that are private sector businesses, 96% have 10 or fewer employees. 94% of businesses recognise they have at least one key person and 6 out of 10 companies would cease trading in 12 months of losing a key person. 75% of businesses have some form of business debt and 53% say Covid-19 has made them more likely to consider business protection.Having this financial protection in place is vital in allowing businesses to recover quickly and minimise the impact should the worst happen.
Source: Legal and General – Business Protection State of Nation SMEs Report 2021
Many businesses have no specific arrangements for their shares on death and owners have rarely considered the impact on themselves, their families, other shareholders or their business. Business protection is a way to protect a business by putting provisions in place to ensure your company is not compromised in the event of someone suffering from terminal illness, critical illness or death.
The main types of business protection
- Relevant Life Plan
- Key Person Cover
- Shareholder Protection
- Business Loan Protection
- Executive Income Protection
Relevant Life Plan (RLP)
A relevant life plan is insurance for an employee in case of death in service. It’s a plan paid into by the employer, which is designed to pay a lump sum if the employee dies or is diagnosed with a terminal illness.
Technically, RLPs are not protection for the business, but they are family protection. Employees, Directors and families benefit from the insurance, not the business itself. They are owned and paid for by the business, so they are categorised as business protection.
Key Person Cover
Key person cover is an insurance policy written on the life of a key person, in the event of their death and upon the diagnosis of a critical illness (if included).
The plan owners are the business and it is designed to make sure the business is financially protected in the event of a loss of a key person/s.
A key person could be defined as someone whose knowledge, work, or overall contribution is considered uniquely valuable to the company, e.g. company director, partner, key sales person, key project manager, etc.
What type of impact does the loss of a key person have on a business?
- The impact if Key Person dies could mean profits may fall (current and projected)
- Banks may recall loans and / or finance for future projects could be difficult
- Business contracts could be lost (existing and potential)
- Production could impact upon customer experience
- Staff morale could suffer
Shareholder Protection
Shareholder protection insurance pays your business a lump sum if a shareholder dies or is diagnosed with a critical illness. It provides the capital to help your company purchase the deceased or critically ill person’s share of the business and avoid potential disruption to the services you offer.
If a shareholder dies, then the shares are transferred to their family. However, the family may not want to be involved with the business, so the insurance policy helps to provide funding. The insurance policy would provide the fund to buy the shares from the family.
Loan Protection
Business Loan Protection is either life insurance or life and critical illness cover written on the life of a key individual or individuals. In the event of a valid claim, any money due can be used towards paying off an outstanding debt or loan.
Loan protection is to provide the business with the means to repay a loan, if it was recalled early or to avoid any of the associated problems.
What is the impact of loans being recalled early on a business?
Banks could recall loans early if an owner and / or key person is ill or dies and the business may not have the means to pay the loan back.
Executive Loan
Executive Income Protection is business protection which is designed to meet the needs of a business who want to protect against the financial impact of their employee’s incapacity on the business. The monthly benefit can be used to help fund the employee’s sick pay if they are unable to work as a result of becoming incapacitated.
