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An introduction to business protection

24th May, 2022

When business owners think about protecting their company, they firstly think of public liability insurance and protecting physical business assets such as their business premises and contents, vehicles, key equipment, and stock. Yet despite putting insurance and contingency plans in place for physical business assets many companies have not considered protecting their most valuable and key assets – their people.

People are at the heart of every business and are responsible for its success, so the unexpected loss of a key person or owner through death or critical illness is likely to have a significant impact on its ability to continue trading profitably, or at all.

At a time when many businesses are struggling to survive, continuity and succession planning may not be high on the priority list. However, it is important to consider the financial impact on your business should the worst happen. What provisions do you have in place to protect your profits? What happens to the ownership of the business if a Shareholder dies? Would the company still be able to repay debts or director loan accounts? Would your business survive? Whilst no one can predict the future, having the necessary protection in place will help to ensure your business is not compromised and will provide crucial stability allowing your business to continue to flourish should the unexpected happen. 

Business protection is designed to protect your business from the financial losses incurred if a key person or owner of a business should die or be diagnosed with a critical illness. In this event, having the appropriate protection in place can help your business continue to trade and can assist in funding the replacement of key individuals, and the repayment of debt. It can also ensure funds are available to purchase shares from the deceased business owner’s estate, giving you added peace of mind that your business could live on.

There are different types of business protection: 

Business loan protection: The proceeds are used to repay outstanding business loans (including bank loans and director loan accounts) should the guarantor die or be diagnosed with a specified critical illness, if chosen. 

Key person protection: This helps safeguard a business against the financial impact of the death and/or critical illness of a key person. The proceeds are paid directly to the business to provide funds to replace the key person, cover any profit loss and help your business to continue trading. 

Shareholder protection: The proceeds are used to help buy the shareholding of the business if an owner dies or is diagnosed with a critical illness, if chosen. If a business owner dies with no shareholder protection in place, their share in the business may be passed onto their family. This means that the surviving business owners could lose control of a proportion or potentially all the business. The surviving family member may choose to become involved in the ongoing running of the business or could decide to sell their share to a competitor. 

Shareholder protection provides funds to compensate the bereaved family for the value of their shares in the business and prevents the need for the family to take control of a business they may know nothing about. This also enables the remaining shareholders to stay in control of the business by preventing the shareholding from being inherited by a beneficiary whose priorities may not align with their own. This should be accompanied by a cross option agreement which provides the surviving shareholder(s) the option to buy back a deceased business owner’s shares and the legal representatives of the deceased’s estate also have the option to sell the shares to the remaining shareholders. Either party may exercise this option.

Relevant Life Protection: This offers a tax and cost-efficient way to provide life cover for an employee, which may include directors, whilst they are employed. The life cover is tailored to you and your employees, however, counts as an allowable business expense and is therefore tax deductible. Benefits do not count towards annual or lifetime pension allowances and in most cases, benefits are paid free of inheritance tax.

If you would like to learn more about business protection and receive advice on how we can help you identify the right solutions for your business, please request a call or contact your existing Davy UK adviser.