3 types of business protection all business owners should consider

Your business is something you take great pride in. It’s not just your livelihood, it may also reflect your achievements and values. So, understandably, you want to protect it from bad luck, unfortunate accidents, and unexpected setbacks.

Many people do so by taking out insurance to cover their business premises and equipment. But have you thought about your staff? If something happens to the people you rely on – including yourself – it could seriously impact the future of your business.

This is an issue that few business owners have considered. Royal London reports that four in five SMEs in the UK don’t have business protection cover at all. This risks major disruption to their business should anything unexpected happen.

If we’ve learned anything from 2020, it’s that something can happen to you or your employees at any time. Making sure you have the right business protection in place can make you feel more confident about the future of your business.

Why business owners might need protection

According to Money Advisor, almost half of UK businesses would be forced to stop trading immediately if they lost a key person due to death, illness or injury.

What would you do if you, or an important member of your team, were to be off work for an extended period or, worse, pass away? What impact would it have on the operation of your business?

Business protection helps you to minimise disruption to your business. It can cover key people with knowledge of your business or important skills, such as your partner, shareholders, or even yourself as a director, owner, partner, co-owner, shareholder, or sole trader.

It can help to keep your business running in the face of lost expertise and give you the peace of mind that you can run your business without worries about the future.

Find the right type of protection for your business

Whether you’re a sole trader, or your business is a limited company, partnership or LLP, you will likely benefit from at least one type of business protection.

It’s important to understand the different kinds of insurance available. Here are three ways you can protect your business in case the worst happens.

1. Key person insurance

Key person insurance will provide a tax-free lump sum to your business if someone vital to the running of your company either dies or is diagnosed with a serious illness.

It’s designed to protect a business whose success may be reliant on these key employees. This can be particularly useful for a small company, where the loss of a single key person could have major consequences.

If you make a claim, you will get either a lump sum payment or a regular monthly sum. This money can give you the funds to recruit a replacement, or even replace lost profits.

Anyone who significantly contributes to the financial success of your business thanks to their skills, knowledge, experience, and leadership could be covered as a key person. You could insure yourself as the owner of the business or as a sole trader, office managers and other people who are crucial to day-to-day operations, or employees with a very particular set of skills.

To work out which key people to cover, think about what impact their loss would have on your business.

• How would your business function without them?
• What effect would losing them have on revenue?
• Would your business have enough funds to survive until a replacement was found?

If your business would suffer from the loss of this person, you should consider putting appropriate protection in place.

2. Relevant life cover

Relevant life cover provides valuable life cover for your employees and their families. It pays out a tax-free lump sum to an employee’s beneficiaries if they die while in your employment.

You can cover any employee, or yourself, as long as they are a UK resident and work for your business in a PAYE capacity. The only people who aren’t eligible for cover are sole traders, equity partners in a partnership, and members of a limited liability partnership.

If you’re a company director and you currently pay for your life insurance from your own income, relevant life cover could also save you money as your company could pay for this cover instead.

In broad terms, Unbiased say that a basic rate taxpayer currently paying £100 a month for personal life insurance could save 31.5% every month by switching to a relevant life policy. Those in higher tax brackets could save even more.

Relevant life cover can be an enticing employee benefit that can help your business attract and retain higher-quality employees, and perhaps even boost workplace morale. It can be taken out in addition to an existing insurance, which could make for a very desirable benefits package. And, as this cover is available to companies of all sizes, it’s a particularly viable option for smaller business who aren’t eligible for group insurance packages.

Relevant cover is also particularly appealing for high-earning employees nearing their maximum allowances.

Death in Service pay-outs are usually classed as a pension benefit for tax purposes and are added to an employee’s pension pot. A pay-out of a multiple of salary could easily push an individual over the pension Lifetime Allowance (£1,073,100 in 2020/21) and result in a tax charge of 55%.

As relevant life cover pay-outs don’t count towards annual or lifetime pension allowances they avoid this charge.

Relevant life cover is also tax-efficient because premiums are usually viewed as an allowable business expense, not a benefit in kind. So, neither employers nor employees pay Income Tax or National Insurance on premiums, and you can deduct the premiums as a business expense when calculating tax liability to lower your Corporation Tax bill.

3. Shareholder protection

Shareholder protection pays out a lump sum to the remaining shareholders in the event of your death, enabling your co-owners to purchase your shares in the business.

The insured sum is usually equivalent to the value of your shares and is paid out as a lump sum upon death. You can also choose to write this into trust to benefit your co-shareholders.

Shareholder protection will also benefit your family if you die unexpectedly. If you were to pass away, your family might inherit your share in the business. But, at this time, they may be more in need of liquid assets than a business share and may have no interest in being involved in the day-to-day running of the business.

Shareholder protection enables remaining shareholders to buy your shares, relieving your family of any responsibilities to the business and giving them the liquid assets they need.

Get in touch

Whatever your business is, we can help you find the cover you need to protect your business and give you peace of mind. Email enquiries@prosserknowles.co.uk or click here to request a call back from one of our advisers.