Our guide takes a look at life insurance
for business owners. If someone became ill or passed away in the company, it can seriously affect the business. We go through the different types of insurance for business owners and what they are for, to help you consider the best type of insurance for your business.
What is business life insurance?
Many businesses take out insurance for their equipment and premises, but often do not consider the key people in the business. If you or another member of staff passed away or suffered from a critical illness, there may be practical problems and financial implications. If something happens to the staff or partners of your business, or you, business life insurance can provide financial support. It protects the people, profits, and future of your business.
Key Person Insurance
This protects your business against losing a key person in the company – if one person became ill and was unable to work, or dies, the business may be badly affected because their important contribution would be lost. Business life insurance policies defines a key person as an owner or senior member of the company. For example, a sales or finance director or head of product development.
Premiums are decided by calculating how profitable the key person is for your business, as the person helps to create a profit which would be an issue if they could no longer work. As this insurance is paid for and owned by your business, the business would be the beneficiary in the case of the leading employee being unable to work. For some companies, a cash lump sum is paid to your business in the event of a claim. The money from the claim can go towards whatever the business chooses – recruiting new staff, covering a loss in profits or easing cash flow.
When there is no legal partnership agreement in place, the death of a business partner may lead to the partnership closing down. The proceeds fall into the estate and the family will usually receive this. For partnerships, a policy is taken out on an own-life basis and placed in trust for the other partners.
Relevant Life Cover
Relevant life cover is for small businesses with less than five employees. It can be a tax efficient way of offering death in service benefits. Death in service cover pays out a lump sum, of up to five times your salary, if you pass away while employed by your company. You must be on the payroll at the time of death to qualify for payment, and it ends if you leave a company. The cost depends on factors such as age, health and lifestyle.
It’s tax efficient because in some cases, it can be claimed as a business expense rather than ‘benefit-in-kind’, so there will be no income tax to pay. Also, the policy can be written ‘in trust’, which would protect you against inheritance tax payments. A claim can be made if the person named in the policy passes away or has a terminal illness. However, this type of cover must end when the person is 75, and critical illness cover is not included.
Business Protection Insurance
This insurance can cover various types of debt, such as director’s loans to venture capital loans or overdrafts. The claim can be paid to a business instead of a family member. Policies can be taken out for employees and business owners with the amount of cover reflecting the amount of debt. Also, you can protect a business owner in the event of them passing away or becoming seriously ill, to provide a lump sum which covers your business loans and other debts. For partnerships, any policies that are set up would be placed in trust for the partners of the business.
With this policy, if a business partner or shareholder were to pass away, the remaining colleagues have the chance to buy up their proportion of the company. This is instead of the assets going to their dependants since what they want may not suit the business needs. The family may prefer to receive a lump sum, but you may not have the cash flow for this, meaning you must sell on the shares which could reduce your control of the business.
There are different options to choose from, such as Shareholder Protection, Partnership Protection and Limited Liability Protection. These options enable each shareholder or partner to take out a policy that reflects the value of their shares. A plan would then be made determining how those shares should be valued.
A way of making your workforce feel valued is through offering employee benefits – options such as critical illness cover and income protection which can attract the best people for the job. This is because it demonstrates that the business cares about looking after the staff. Employee benefits can help the people at your company, or their family, by providing them with money as payments or as a lump sum.