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Jason McGuigan used to run Critchleys Financial Planning LLP in Oxford before it was acquired by Wren Sterling in June 2022. He now heads Wren Sterling’s Oxford office, but as a former director and business owner, he is acutely aware of the value of getting the right protection in place to ensure the continuity of the business.
As a former business owner myself, I understand what it’s like to manage risk within a business… From a business protection perspective, I think the owner-manager needs to ask themselves the question: what happens if?
What would be the implications to the business in the event of the death or serious illness of a key individual?
We all take out insurance to cover things like cars, houses and contents, but from my experience, very few people have considered taking out protection to cover the loss of key people within a business. There are four main areas of focus for business protection:
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Loan Protection
I find there are four key areas where business protection can help. The first one is something called loan protection.
Loan protection works on the basis that if you have taken out loans within your business, you want to ensure that in the event of death or serious illness that loan is repaid to provide cash to the business to allow continuity moving forward. The immediate aftermath of an event like this and the pressure to repay a loan, when there’s a dip in performance, can be stressful – and avoided with loan protection.
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Key Person Insurance
The next area I think is important is key person assurance. Businesses are often not reliant on just one individual.
There may be a number of key individuals that contribute to the success and profitability of that business and key person insurance provides the funds in the event of death or serious illness of a key person.
It means there is a cash injection going into the business to provide continuity and to help the business owner(s) use those funds to potentially recruit a replacement.
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Shareholder or Partnership Protection
Another key area for consideration is shareholder protection or partnership protection. Again, businesses may not necessarily be owned by one individual, they may be owned by a selection of individuals. All of those individuals may have proportionate shares in that business and at some point in the future they might want to sell those shares and realise value. But going back to my what-if question again, what would be the implications if you don’t reach retirement? What if you were to die or become seriously ill?
It is likely that in the event of becoming seriously ill, you would want to realise your equity, or your estate or your family would want to realise your share value if you die. Should that happen that’s going to have a significant impact on the business.
Shareholder or partnership protection ensures that in the event of the death of a shareholder or partner, there is cash provided to the business to provide the funds to pay off the exiting shareholder or partner, or on death, to provide funds to buy the share from the deceased’s beneficiaries. -
Relevant Life Cover
The final area, which I think is worthy of consideration is in terms of relevant life cover. Most of us take out insurance on our own. This is generally to protect our families in the event of death, but relevant life offers significant tax benefits to the owner-manager of a limited company, or limited company director. This is because the insurance premiums are usually tax deductible. Also, there’s no benefit-in-kind charge levied on the individual to the value of the premiums or the benefit that would be payable in the event of death to their families.
So, if you do have individual life insurance policies running and you are a director of a limited company, you may want to consider looking at relevant life as an alternative because the tax breaks are significant.
