All companies will have a variety of insurances such as public and personal liability, company vehicle insurance, and commercial property insurance as a minimum.
However, many businesses overlook the protection of their most important assets and fail to cover the very thing that could put an end to the company and its income – the death or illness of the business owner, or key person.
Business Protection is about protecting the people and profits of the business and can be broadly summarised into four areas.
Key Person insurance
Most businesses will have individuals who are vital to the profitable running of the business due to their specialist knowledge or skills. The event of them suffering an illness, accident or dying could lead to serious financial consequences for the business.
Key person insurance is designed to protect the business with financial support in such circumstances.
Loan Protection insurance
Many businesses have loans with banks or other financial institutions, most lenders will want the outstanding balances covered by life and or critical illness cover.
It is also a common practice for business owners to lend money to their own businesses. These are known as Partners or Directors loan accounts, which also need repaying in the event of death.
Should a business owner wish to retire due to death or critical illness two problems may arise:
The first is control
The remaining partners or shareholders will want to retain control of their business.
This will usually mean purchasing the deceased or retiring owner’s share of the business.
However, problems can arise when attempting to raise the substantial amount of capital that may be needed. This is especially the case when the owner was a key person within the business.
The provision of the cash needed through the correct type of insurance is the backbone of good succession planning.
The second is fair value
Without the correct funding and agreement that defines the value of the business, there would be no guarantee that the sale of the business share would represent fair value at the time of death or retirement.
Shareholder/Partnership Protection provides both the funds and structure to facilitate these objectives.
Many businesses only have the basic documents to run – The Memorandum and Articles of Association.
Other documents are needed to ensure that both the deceased/retired loved ones can receive the value of the shares and that the company has the option to buy them. And a Schedule of Assets and Liabilities so that everyone knows what is owned and owed.
Business Protection Insurance is a crucial part of protecting businesses and their owners.