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Business Protection: Do you have the right cover in place?
Diarmuid Phoenix from Mint Mortgages and Protection joins the podcast to discuss business protection.
What is business loan protection?
Business loan protection is an insurance policy that’s taken out by a business that has borrowed money. For example, a company is taking commercial finance to build an office.
They take out a loan for £150,000 over a 10 year period. And much in the same way as you would protect your own personal mortgage, you can take out business loan protection. It means that should a company director die, the amount of debt left on the loan is paid by the insurance.
How does business loan protection work?
It’s similar to personal life insurance. The business takes out the policy on the lives of individuals – for example, you might have two company directors. The main concern is that if you take out a big loan and one of the individuals in the business dies or gets seriously ill during that period, it will affect the ability to repay the loan.
The insurance policy covers both the interest and capital on the loan in a lump sum payout.
Can you take out life insurance on a business partner?
Yes, definitely. When you’ve got two partners in business together, if one of them was to die it would have a detrimental effect on the business. A life insurance policy can cover each partner, so if one dies, a lump sum is paid to the business to cover the loss of income or turnover.
Why do we need business protection?
To answer this question you need to think about the consequences of not having protection in place.
If you were to take out a large loan against the business as a sole trader, for example, or a partnership, and you or your partner dies without any protection in place, how would you repay the loan? Will you have to use proceeds from the business or sell assets? Or, worst case scenario, will the debt close your business down?
Business protection takes away the pressure that if the worst were to happen your business can continue to trade.
What is critical illness cover for business?
Critical illness cover is a form of term insurance, like life insurance, which pays out a lump sum on diagnosis of a set of serious illnesses that are predetermined by your policy.
Some policies are more comprehensive than others, and you take it out for a particular term. So, for example, in terms of business protection, you might take it out until retirement.
Critical illness cover gives a business breathing space. An injection of capital into a family-oriented business means that the individual who suffers the illness can concentrate on getting better, without having to worry about where money’s coming from.
What is a Relevant Life Plan?
Relevant Life is life insurance that is paid for by the business. It works in the same way as death in service benefits, which are common in the public sector. If I’m a teacher for example, and I die within my working life, my spouse will get a multiple of my salary paid out upon my death.
The private sector introduced relevant life insurance to offer this to their employees. It means that company directors can pay their life insurance through the business, and there is a tax saving this way. The business gets corporation tax relief on the premiums.
The money is paid out in the same way as any life insurance policy – to the family, tax-free.
What is Key Person Insurance?
Key Person Insurance differs from Relevant Life in that it can incorporate critical illness. Plus, rather than payment going to the individual or the family, it’s paid to the business.
It’s important if you’ve got a business where if something happened to a key employee or several key employees there would be a damaging effect on the business. Key Person Insurance will bring money in to replace that person’s income or turnover.
What is Shareholder Protection?
Shareholder protection is a little bit more complicated because it deals with the shares of the company. For example, there are two company directors who are 50% shareholders each. Usually, the death of a shareholder results in their share of the business passing to their family.
But this can present problems to the business. The surviving business partner could end up in business with a family who have no business knowledge or expertise. And in many cases the family would just like to take their share of money out of the business. If there’s not enough capital in the company bank account this might mean selling assets or folding the business.
Instead, shareholder protection takes life insurance on each of the shareholders. Upon their death, a lump sum is paid into the business which can enable the surviving partner to buy the other’s shares.
You can also set up a cross option or double option agreement, which protects all parties. It means the surviving business partner can force their partner’s family to sell the shares back. Or, if the surviving family decides they want to take over the business, they can buy out the other partner if they choose to.
How much should a business set aside for business protection?
First, I would never recommend using comparison sites. Every business is different and has different needs. The cost will depend on various factors: the value of the shares of the business, how long people will be a shareholder for, etc.
Then there are unique details about the individual: their age, their smoker status and health conditions. Protection is important, and you need to get it right. Speak to a qualified financial adviser who specialises in business protection for clear and professional advice.