To ‘P’ or not to ‘P’? – that is the question

Scott Kent, Financial planner
Scott Kent, Financial planner

Now that I have grabbed your attention, I wanted to discuss something that I believe is just as important as the products, services and staff that businesses hire and employ; and that is Business Protection (the ‘P’).

Whilst there is recognition of the need to cover risks which may affect machinery, technological equipment and the premises, so that should the worst happen (i.e. fire, theft, malfunction etc.), there is protection in place to cover the cost of fixing or replacing such, the one element of cover that, from our experience, seems to be commonly overlooked is that of protection for the business owners and their key members of staff.

A report published by Legal & General last year stated that 52% of businesses would cease trading in under a year if a key person died or became critically ill. Whilst it is in our human nature to believe that the worst will never happen to us, unfortunately, the statistics beg to differ! According to Liverpool Victoria (using their industry and population statistics), there is a 25% chance that a 40-year-old man would be unable to work for two months or more during their working life, and a 13% chance that they would suffer a serious illness during the same period. Once the risk of death is included, there is a 31% chance that any one of these events could happen over a 25-year period. Have I scared you now?!

If you are still unsure whether business protection is a good idea, what would your answers be to the following questions?: How would your business and staff continue to operate if you were unable to work due to a serious illness or passed away?”, How would your revenues be affected if the same were to happen to your Marketing Manager, Head of Sales or Head of IT?, Would the business be able to repay any liabilities if you or a key employee were to die? If alarm bells have just started ringing, don’t worry, there are options available that may be a suitable fit for you and your business, two of which that I believe every business owner should consider are Key Person Cover, and Share & Partnership Protection.

Key Person Cover

To provide a simple illustration, a business would take out an assurance policy on the life of a key person to protect itself against the financial loss that might result if they died, became seriously ill, or were unable to work because of a long-term disability. So what defines a ‘key’ member of staff? Well, this will differ from business to business, but it could be the Chief Executive, the Head of Sales who has a strong working relationship with their customers, the Finance Director, or even the Head of IT. Essentially, it is someone who is critical to keeping the business going, whereby their loss would have a significant financial impact on the success of the business. Should the life assured die or be diagnosed with a specified critical illness (should the latter cover be included) during the policy term, then the business itself would benefit from a lump sum payment that could be used to cover the costs of finding and training a suitable replacement, repaying any debts, or simply replacing lost profits. In essence, the financial pay-out received could provide some comfort to both the owner and the staff that there is capital available to the firm during what would be a very difficult time for the business.

Share & Partnership Protection

Share & Partnership Protection, as implied by the name, is aimed specifically at the owners of the business. It is typical to find that the business owner’s/partner’s stake will pass to their family in the event of their death (as set out in the instructions within their will). If they are a majority stakeholder, this might cause concern for both the other owners of the firm, who may feel that they will be overlooked, and also the surviving spouse/civil partner, who may not want to be responsible for the business moving forward. This type of protection involves two parts: Firstly, a life insurance policy (Critical Illness Cover again may also be included) is taken out by the business on the life of another, which in this instance would be the shareholders and partners of the firm. Secondly, a legal agreement would need to be drafted and signed to state when and how the shares would be bought (and at what price). Whilst this is more complex, it means that in the event that one of the shareholders were to die, or was unable to work due to disability, the business would benefit from a lump sum payment that can be used to purchase the shares, for a fair value, from the shareholder or deceased estate and, therefore, allow the company to be retained by those wishing to run the business going forward. Cost, of course, will be one of the drivers behind whether or not a protection policy is taken out. With both of these policies it may be possible to offset the premiums paid by the business against their Corporation Tax bill (there are some instances where this cannot apply), as it is often considered as an allowable business expense. Although, please note, care needs to be taken if the premiums do qualify for tax relief, as the sum assured following a successful claim will be taxable. So to answer my rather crude question; to ‘P’ or not to ‘P’? My answer would be “Yes!” Businesses, regardless of size, should be reviewing their continuity plans and considering whether or not there is a need for business protection. Whether the outcome is to ensure repayment of debt, provision of funds to recruit specialist staff, or even purchasing shares from a deceased business partner/director’s estate, it is better to consider these plans now, rather than when it may be too late. As a long-standing and trusted Wealth Management firm based in Northampton, not only can we provide you with an ongoing financial planning service in respect of your own investments, pensions, protection and helping you to ultimately achieve your personal goals, we can also help you continue to look after and protect your business interests as well.

Cave & Sons Ltd is authorised and regulated by the Financial Conduct Authority (FCA), Financial Services Register number 143715.

This communication is for general information only and is not intended to be individual product/investment advice, tax or legal advice. The views expressed in this article are those of Cave & Sons and should not be considered as advice or a recommendation to buy, sell or hold a particular investment or product. You are recommended to seek professional regulated advice before taking any action.

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