As the owner of a small or medium-sized business, you have likely insured your assets against the possibility of fire, theft or flood. But are you protected against the loss of key employees? Have you thought about how you’d buy back a deceased business partner’s shares or repay their business loan?
The loss of key individuals can hit small businesses hard, so if the answer to any of these questions is ‘no’, you might consider Business Protection Insurance.
What is Business Protection Insurance?
Like other forms of insurance, Business Protection Insurance guards your business against the unexpected. Rather than covering the business premises or the tangible goods within it, it protects against the loss of another important asset – your key people.
Business Protection Insurance can provide a payout in the event of the death – or in some cases, critical illness – of a key member of staff. It can also provide funds to buy back their shares or pay off commercial debt.
A recent report for Money Marketing confirmed that ‘over half (54%) of small business owners don’t currently have Key Person Protection and 20% had never heard of it.’
And yet, a Legal & General study found that ‘52% of the UK’s small businesses think they would cease trading in less than a year, should a key employee die or be diagnosed with a critical illness and be unable to work’.
What types of Business Protection Insurance are there?
There are three main types of Business Protection Insurance:
1. Key Person Protection
If you run a small or medium-sized business, you might be dependent on a few key people. You might have a business partner with expert knowledge or clients that will only work with one of your colleagues.
Key Person Protection is essentially life insurance (possibly with critical illness cover too). It pays out if one of your key personnel dies or becomes critically ill.
The payout can cover loss of profit, the cost of replacing expert knowledge (advertising, training a new member of staff) or the loss of sales, if clients are unwilling to work with a different member of your team.
The impact on a small business of a key staff member’s death is clear:
Source: Legal and General
The costs of replacing key staff can include recruitment agency costs – sometimes up to 30% of the salary being offered, according to Money Marketing – plus the costs of relocation, ‘golden hellos’ and share option buyouts.
Having Key Person Protection in place could allow you to keep the business stable during a difficult time.
2. Business Loan Protection
Your small business will likely have some form of debt. Whether it’s an overdraft, a commercial mortgage, or your own investment in the business, the death of a colleague might leave you struggling to keep up with payments.
You can use Business Loan Protection to cover the cost of any outstanding debt, paying it off in full in the event of a colleague’s death.
If you have invested your own money into the company, you will have to keep track of the amount you pay in or take back out, once the business becomes profitable. If you and your fellow directors all have amounts invested, these can be individually ring-fenced, but an individual’s invested amount must be paid back in full in the event of their death.
Business Loan Protection covers the cost of this liability.
3. Share Protection
The death of a colleague and shareholder could have a large impact on your business. The shares that the deceased held will most likely pass on to a member of their family. They might be happy as a silent partner, but they might want a say in how the business is now run.
If a majority shareholder dies, you and your remaining co-owners could lose some, or all, control.
The beneficiary of the deceased’s estate might want to sell their shares. This means you could buy them back and retain control, but only if you can afford to buy them.
Share Protection – a life insurance policy paid out on the death of a shareholder – will allow you and your business partners to buy your colleague’s shares.
The easiest way to set this up is as a Share Protection Arrangement. Each owner sets up a life insurance policy equal to their shareholding and writes it in trust to the other members of the business.
Pros and Cons
Setting up Business Protection Insurance can be complicated but the effects of losing a key member of staff can be far-reaching for a small business.
Protecting against this loss can give:
- Remaining business owners and their families financial peace of mind
- Remaining shareholders the chance to buy the deceased’s shares and retain control over their company
- Businesses an opportunity to pay off business loans.
There are some downsides to Business Protection Insurance too.
- Strict rules exist around companies buying back shares. A buy-back agreement will likely need to be put in place and reviewed regularly
- For a larger company – two or three shareholders or partners – multiple plans are needed to protect an individual against the death of each of the others
- Share buyback might not be suitable for a new company as the shares need to be held for five years to count as a disposal for Capital Gains Tax purposes.
If your business would suffer from the loss of one or more of its key people, consider whether the cost of Business Protection Insurance could save you money – or even save your business – if the unexpected happened.
Whether it helps you find a replacement member of staff, pay off business loans or buy back shares, it could give you peace of mind during a difficult time.
Get in touch
If you’d like to discuss protecting your business through Business Protection Insurance, get in touch. Please email firstname.lastname@example.org or call 0115 933 8433.
Life Assurance plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.