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Why is Business Protection so important?

Aron Gunningham, Financial Planning Consultant
06/10/2022
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Whether you are a sole trader, SME or larger business, no matter how much you would prefer not to think about the possibilities of things going wrong, something inevitably does.

Having the right protection in place can ensure that when things take a turn for the worst, your business is able to work through the disruption and remain financially stable.

Every business is different and therefore your business's insurance needs will typically be dependent on what it does, it's structure, location and whether or not you have any employees.

Key Person Protection (profit protection)

Key Person Protection (profit protection) helps safeguard a business against the financial effects of death, terminal illness, or critical illness of a key person during the policy term.

The loss of a key person may result in: reduced sales, loss of profit/turnover, wasted time, recruitment costs, and the disruption of development plans or increased workloads for the remaining staff. It may even cause loss of confidence in a business.

Relevant Life Plan

A Relevant Life Plan is a term assurance plan available to employers to provide an individual death in service benefit for an employee. It is designed to pay a lump sum if the employee dies whilst employed during the length of the policy. It will also pay out if the employee, while employed, is diagnosed with a terminal illness and meets the provider’s definition at any time during cover.

A Relevant Life Plan is paid for by the employer and if the insured person dies, it is the family that receives the pay-out, not the business itself.

It's important to note that a Relevant Life Plan will only cover those who receive a salary from a business. A sole trader or a Partner (within a Partnership), are not eligible for this type of insurance policy. However, this does not prevent them from buying regular life insurance out of their own income in the normal way.

Partner/Director/LimitedLiability Partnership Share Protection

The loss of a business owner may destabilise the business and can quickly lead to financial difficulties. For example, when a business owner, Director or Partner dies, then their stake (or shares) in the business are likely to pass directly to their family. If this was a majority stakeholder (or shareholder), this could mean that the remaining owners lose control of some – or all – of the business, and have to work with the spouse, child or sibling of a former owner. This may present a variety of unwanted complications (such as active involvement with an inheriting party, who may have different ideas on what the business should be doing, or even a potential ‘second-hand’ sale to a competitor).

Partner/Director/LLP Share Protection means if the worst were to happen, the remaining Partners/Directors/members could potentially stay in control of the business.

Business Loan Protection

The loss of the person(s) who have guaranteed a loan is particularly serious for a business. Business Loan Protection helps a business pay an outstanding overdraft, loan (including Director’s loans) or commercial mortgage, should the guarantor die or become terminally or critically ill during the policy term.

Important notes and risk warnings

This notice cannot disclose all the risks associated with the protection issues outlined earlier. You should not affect any financial product unless you understand its nature and the extent of your exposure to risk. You should also be satisfied that it is suitable for you in the light of your circumstances and financial position. Different products have varied levels of exposure to risks and to different combinations of risks.

The information provided is based on our understanding of current taxation law and HMRC practice, which may be subject to change.

Reference has been made to information available on the Legal & General website

Before a company (or other entity) takes out an insurance policy, it may be important for the entity to know whether the policy payments will qualify for tax relief or if the proceeds on a claim will be tax-free (or as trading income). These principles have come to be known as the ‘Anderson rules’ and are covered within the HMRC’s Business Income Manual.

Whether or not tax relief is given on the premiums should typically not be a priority when putting cover in place.

The tax treatment and associated implications for setting up a policy to cover 'Key Person Protection', 'Share Protection', 'Relevant Life Policy' or 'Business Loan Protection' can be very different. Therefore, it’s important that these are always set up as separate policies.

Additionally, there may be a number of different (and significant) taxation issues and other associated factors and implications to be aware of.  For example, there may be impacts upon: Inheritance Tax (IHT), pre-owned asset tax charge (POAT), Capital Gains Tax (CGT), Business Property Relief. Appropriate professional advice should be sought before proceeding further.

The level and cost of protection required will depend on individual circumstances and various other associated factors. This would be particularly true for: company and shareholder valuations for shareholder protection; and the attributable contribution to profits of key persons.

If you would like to review the options available for your business protection then please speak with your financial advisor or contact one of our Financial Planning Consultants who will be delighted to discuss your options with you.

Please note the information contained is correct as at the date of this article.
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The information set out in our publications is for information purposes only and does not constitute advice to undertake a particular transaction. Appropriate professional advice should be taken on specific issues before any course of action is pursued. Any advice provided by a Crowe Consultant will follow only after consideration of all aspect of our internal advice guidance.

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Why is Business Protection so important?
Whatever your business and no matter how much you would prefer not to think about the possibilities of things going wrong, something inevitably does.