Does your business need business protection?

Running a business is exciting, but it also comes with risks that can threaten its survival. Many business owners focus on growth, sales, and customer service but overlook what happens if something goes wrong. Business protection is a vital safety net that ensures your company can withstand unexpected events like the death or critical illness of a key person, a business partner, or a guarantor on a loan.

What is Business Protection?

Business protection refers to a suite of insurance and financial arrangements designed to keep your business running if unforeseen circumstances occur. Common types include:

1. Key Person Insurance

This type of protection is a life or critical illness policy taken out by a business on the life of an employee or director whose contribution is vital to the company’s success. The business pays the premium and receives the payout if the insured person dies or becomes critically ill. 

The payout can be used to:

• recruit and train a replacement
• cover lost revenue during the transition period
• maintain client relationships and operational stability.

How does it work? 

The business identifies a key individual, and a policy is taken out with a sum assured, based on the financial impact of losing them. If the insured event occurs, the payout goes to the business, not the individual’s family. 

Example Scenario:
A tech startup relies on its lead developer for product innovation. If that person becomes critically ill, the payout can fund hiring a new developer and prevent project delays. 

2. Shareholder or Partnership Protection

This type of protection ensures that if a business owner dies or suffers a critical illness, the remaining partners or shareholders have the funds to buy out their share. Without this, ownership could transfer to family members who may not want to be involved in the business, or worse, sell to a competitor.

Why is it important?

• It maintains control within the business
• It prevents disputes with heirs or third parties
• It provides financial security for the deceased partner’s family.

How does it work?

A legal agreement (cross-option agreement) is set up between the shareholders, and each shareholder is insured for an amount equal to the value of the shares. If an insured event occurs, the policy pays out to the remaining shareholder, who uses the funds to purchase the shares from the affected part or their estate.

Example Scenario:
In a law firm partnership, one partner passes away unexpectedly. The policy provides funds for the surviving partners to purchase the shares of the deceased partner, ensuring smooth business continuity and preventing external interference.

3. Loan Protection

This type of protection is designed to cover outstanding business loans if a guarantor dies or becomes critically ill. Many lenders require personal guarantees for loans, which can put personal assets at risk if something happens to the guarantor.

Why is it important?

• It prevents lenders from calling in loans immediately
• It protects personal assets of guarantors and their families
• It maintains business stability during crises.

How does it work?

The business or guarantor takes out a life or critical illness policy, with a sum assured that matches the outstanding loan amount. If the insured event occurs, the payout is used to repay the loan, avoiding financial strain. 

Example Scenario:

A manufacturing company has a large equipment loan guaranteed by its managing director. If the director passes away unexpectedly, the loan protection policy ensures the loan is repaid, preventing asset liquidation or bankruptcy.

Why is Business Protection important?

Business protection is important because it acts as a financial safety net for your company when unexpected events occur. Without it, the business could face a loss of revenue, a loss of control, potential disputes and much more. 

Tax implications 

The tax treatment depends on the type of policy and its purpose. It is therefore recommended that you seek professional advice to ensure that you have the right policy, understand the tax implications and avoid unexpected liabilities. 

Cost considerations

The cost of business protection depends on the type of cover, but also on several different factors. Some of these factors are the sum assured, the term length, the age and health of the insured individual, and if critical illness is included

How to get started

1. Identify the key risks to the business – Who are your key people? What debts exist? What would happen if they were gone?
2. Assess the financial impact of losing a key employee – Calculate the cost of replacing key individuals and covering lost revenue.
3. Choose the right cover – Work with a financial adviser to tailor solutions for your business structure and its objectives.

Final thoughts

Business protection isn’t just an insurance policy; it’s a strategic decision to safeguard your company’s future. If you haven’t reviewed your protection needs, now is the time. Speak to a financial adviser to ensure your business is prepared for the unexpected. 

Disclaimer: This article does not constitute financial advice, and you should always seek advice from a regulated financial adviser before making any financial decisions.