Which people are key to the successful operation of your business?
A survey of more than 500 firms by Legal & General revealed that 95% of businesses have at least one ‘key’ individual. However, most have no plans in place to deal with the death or serious illness of that individual.
The study also found that two in five respondents said that they expected their business to fold within 18 months of the death or critical illness of a key individual.
In these uncertain times, as a business owner, you’re probably doing everything you can to protect your business. And, protecting the ownership of your business against death or critical illness, as well as your commercial lending and revenue streams, should be something you consider.
To help you work out if there are gaps in your protection, here are ten questions that you should ask in a ‘risk audit’ of your business.
10 questions to ask yourself right now
- Do you have employees who are fundamental to maintaining growth and profitability of your business and whose sudden death (or serious illness) would severely impact your cash flow and/or future profits?
- Would your business be able to continue to pay you if you suffered a serious illness or became incapacitated?
- Would you receive an income from your business if you were unable to go to work for six months or more?
- Have you reviewed your partnerships’/shareholders’ agreement within the last 18 months?
- Do you have a written exit agreement or succession plan for your business?
- Do you know who will inherit the business should an owner die?
- Are you paying for your family life assurance plan out of your own after-tax money?
- Do you have a will or Lasting Power of Attorney?
- Do you have private medical insurance?
- Do you have plans in place to ensure that you maintain your standard of living in the event of serious illness or injury?
If you do identify any risks from this audit – perhaps that you’re paying for life assurance out of after-tax earnings, or that there is insufficient protection in place – then it is time to act.
Some protection options to consider
The results for the ‘risk audit’ above will be different for every business. So, it follows that the needs of every business will be different.
Some firms will have robust shareholder agreements in place and a long-term succession plan. Others will have critical members of staff on whom the business relies.
While the specific needs of your business will determine exactly what measures you need to put in place, here are some of your common business protection options.
Relevant life cover
Relevant life cover is a tax-efficient alternative to a ‘death in service’ benefit that will enable you to pay the family of one of your key employees a cash lump sum if they die while in your employment.
Using a relevant life insurance policy means you can save nearly 50% in tax compared to an ordinary life policy. It’s useful for:
- Company directors – it can provide a useful tax benefit as your life insurance premiums are paid by the business
- High earners – the benefits of a relevant life policy don’t count towards your Lifetime Allowance
- Key employees – this type of cover can provide an individual sum assured, making it perfect for rewarding a few key employees.
Key person insurance
As the Legal & General study found, 95% of businesses have at least one ‘key’ individual. If you have such a person, losing them could have a significant impact on your business.
Key person insurance is designed to help protect your business in the event of death or terminal illness of one or more of your key employees. The policy is designed to pay out a lump sum to cover any loss in revenue or profits – helping to support your business through a difficult period.
According to Legal & General’s research, 58% of businesses have no formal agreement in place to establish what would happen in the event of the death or critical illness of a business owner.
If a business owner dies or suffers a terminal illness, their share of the business usually passes to their beneficiaries. If the surviving business owners want to regain control of that share, they may need to buy that individual’s part of the business.
Shareholder/Partnership protection help pays a lump sum if a business owner dies or suffers a terminal illness. This provides the capital to enable the surviving business owners to buy that individual’s share of the business.
As a business owner, if you die or suffer a terminal illness, lenders may have the right to demand that any outstanding loans are repaid. For example, you may have provided a personal guarantee. This could create cashflow issues for the business.
Business Loan Protection is designed to provide a lump sum to cover your business loans and other credit facilities.
Get in touch
If you have identified risks to your business, we can help to put measures in place to protect you.
Speak to your Black Swan financial planner, email firstname.lastname@example.org or call 020 3828 8100.