Many people think that the term “business protection” is just one generic type of cover that can be shoehorned into just about any business arrangement. This is quite wrong.
All businesses are different, and should have a business protection solution that fits their needs. This paragraphs below set out basic information on the four key types of cover a business should consider: Key Person Cover, Share Protection Cover, Relevant Life Plan and Business Loan Protection. They can be set up separately or combined; usually a small discount can be achieved if more than one type of cover is taken out at the same time.
The manner in which the four types of cover should be applied to different types of business, i.e. limited company/Limited partnership, standard partnership and sole trader, will vary somewhat , as will the proper use of trusts and any side agreements where appropriate. This is a skilled area where an experienced insurance intermediary earns his keep.
Businesses should not go it alone in setting up their cover, and whilst it is common for banks to provide cover to businesses particularly where business loans are concerned, bear in mind that the terms obtained from your bankers are rarely as competitive as can be found through an independent intermediary, so if you feel you have a choice, (i.e. your friendly bank hasn’t got a gun to your head!) get a second quote by calling us on 0845 013 6525 (might as well get a sales pitch in!).
The general rule regarding tax relief on premiums, or potential taxation of benefits, is if tax relief is obtained on premiums the benefits are liable to be taxable, and if no tax relief is obtained on premiums then benefits are likely to be tax-free. The exception to this principle would be the Relevant Life plan where premiums may be treated as a business expense for tax purposes in the majority of cases (so long as the “wholly and exclusively” rule is considered to be met) and any policy proceeds should be free of tax in the hands of the beneficiaries.
We recommend that the business checks their tax position on their proposed business protection (usually through its accountant) with the local Inspector of taxes, to gain comfort and confirmation.
Key Person Protection
This is designed to pay the policy proceeds directly to the business on the death or critical illness of the key person, which can be used to help replace that key person, cover the loss of profits that may occur or repay a loan. The policy proceeds would help a business to continue trading through a difficult time.
Share Ownership Protection
Designed to provide the surviving shareholders / partners with the funds to purchase the deceased’s or critically ill partner’s/director’s/member’s share of the business. The policy would be under trust and would also require a cross option agreement to be put in place, which gives the survivors the right to purchase (and can also give the deceased’s representatives the right to force the sale). The cross option agreement therefore necessarily requires an agreed method of valuation of the business to be appended. The business can select a simple calculation (e.g. a multiple of average profits over the past n years), design it from scratch or otherwise take advice from their IFAs or accountants.
This type of cover is relevant to practically all business organisations. Whilst the paperwork and business valuation side of things may seem a little daunting, a good intermediary will help you by careful fact-finding and design of the right plan structure for your business, and implement it along with completion of all of the relevant trust forms. Your accountant should also probably be involved if only to confirm understandings as to likely future tax treatment under certain scenarios.
Relevant Life Plan
This is a tax efficient single life Death in Service benefit for employees or directors of a business. The policy proceeds are paid to the Trustees (employer) and the benefit is written under Trust for the life assureds beneficiaries. Typically there is tax relief on premiums and no tax on proceeds making this a very popular type of plan amongst small businesses which do not have group life policies, or as additional cover for directors and senior management for firms which do. Critical illness cover is not available under this type of plan.
Business Loan Protection
This is designed to pay off any outstanding loans the business may have should a main shareholder, director, partner or other key individual suffer a critical illness (if selected) or die. It shares many things in common with the more general Key Man protection, but is likely to be of a fixed term in line with the loan. If you think your business is going to regularly roll over its finance then it might be prudent to take out cover over the longer term, rather than take out a new policy every few years, which would be cheaper in the long term and avoid the risk of high future premium costs if the insured’s health should decline in future.