Business Protection: are you fully covered?
When it comes to the things that matter, we all make sure that we’re covered. Our home, our cars, our families, even our pets. For many, however, this does not extend to their businesses.
Businesses without the relevant forms of protection can struggle or even fold in the event of a key person’s death. This should go without saying, but the latest research from Legal & General shows that a substantial number of companies are placing themselves at unnecessary risk.
Should your business lose one of its key people, business protection ensures that you can continue to trade, with the policy allowing companies to source a replacement, protect any debt and purchase the deceased partner’s shares.
There are various forms of protection that business owners can take out to safeguard the future of their organisation and their employees. We briefly consider each in turn, explaining their purpose and poring over the figures.
Business Loan Protection
This helps businesses pay off outstanding debts, overdrafts, loans or commercial mortgages should the policy holder die. These payments can be made either to the business to help cover the debt, or directly to the lender. Without it, creditors could call in those debts, putting the business in further jeopardy.
57% of businesses have some form of debt – a figure which has increased by 25% in the last five years.
The average business will borrow £344,000 – yet despite these six-figure sums, a surprising number of companies do not take out cover against these debts. Smaller and newer businesses are perceived to be at the greatest risk. 43% of recent start-ups have no protection in this regard – nor do 58% of SMEs valued at £250,000 and under.
Many of the companies surveyed have a directors’ loan account, with many requiring extra funds for start-up capital, business expansion or investment. However, over a quarter of these were previously unaware that these loans had to be repaid upon the director’s death.
Key Person Protection
How would your business fare without one of its key people? Many might well assume that life would go on, a replacement would be appointed, and normal service would be resumed.
But losing one of the business’ integral partners can produce substantial costs, both direct and indirect, from the recruitment process to a loss of contacts and confidence. Uncertainty regarding existing contracts, cash injections and credit ratings could bring a hitherto steady business to its knees.
Key Person Protection helps to protect your assets through these potentially turbulent times, insuring against any prospective losses that would be incurred should a key person die or fall critically ill.
More than half of businesses surveyed did not have this protection in place. Expected costs and a surplus of available staff were two reasons proffered for not taking out the cover, but most of those without cover admitted that they had simply not taken it into consideration.
The majority of these companies without Key Person Protection are either sole traders or smaller, newer businesses – and it is these types which are most susceptible to risk. Almost half of recently established ventures – 46% – would cease trading immediately should a key person die; that figure increases to 63% for sole traders.
In short, smaller organisations who forego Key Person Protection could wind up paying the ultimate cost.
Share Protection
This is another area of business protection that can be vital with regards to the future and direction of the business, yet many owners have not made post-death provisions for the sale or distribution of shares. Without this, the deceased’s shares may be passed into the hands of family or less desirable parties, which could deprive other partners of control of the business.
With Share Protection, the value of a business owner’s assets is covered, providing the funds for other partners to come in and buy those remaining shares. The deceased’s family receives the money, and the remaining owners can continue to run the company without the prospect of internal conflict.
16% of those taking part in Legal & General’s study had not considered Share Protection whatsoever, and another 30% said they would buy out those shares using personal wealth – a move which wouldn’t be required had the business taken out the relevant protection.
Elsewhere, confusion reigns regarding the status of those shares. Some are of the belief that beneficiaries would receive an income but would not delve into business affairs; others thought that the shares would automatically be transferred to the remaining owners.
Relevant Life Plans
These plans provide a death in service benefit for individual employees, paying a tax-free lump sum to the families of workers who die or become terminally ill while under contract. Because this type of insurance policy is considered an allowable business expense, employers could save almost 50% on these life plans when compared to their non-relevant equivalents.
Relevant Life Plans are ideal at alternate ends of the spectrum, be it for companies too small to set up a group scheme, or directors seeking a death in service benefit without losing any of their pension lifetime allowance.
Despite the potential benefits, the majority of businesses were simply not aware of Relevant Life Plans. In fact, just 28% had heard of the policy, with small businesses (88%), newer ventures (79%) and established companies (78%) deemed the least likely to have come across it, let alone understand it.
When those surveyed were presented with the information, 62% showed an interest in the policy. It is apparent that Relevant Life Plans, though largely unheralded, would be considered valuable by many business owners.