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Protecting your clients’ businesses

27 February 2020

Most adviser firms will have business owners as clients. Ensuring they have the right insurance protection in place not just for their personal circumstances, but also for their business, can be a valuable part of their financial planning, says Chris Dunne, proposition manager, Scottish Widows

Business owners can all too easily be focussed on the day-to-day challenges of running the business and overlook a vital element of running and maintaining a successful business. It is essential that consideration is given to all the potential risks to the business, not least of which is the potential impact should, for any reason, the business lose them as Leader, or indeed another key member of staff.

Fundamental questions to ask business owners and leaders are: ‘What would happen if one day you were in the unfortunate position where a key person in the business had suddenly died or become critically ill? How would the business cope? What steps have you taken to address this potential situation in your business planning?

You may be surprised by the answers. While businesses will insure equipment and premises they often overlook insuring their key people. Even when some thought has been given to the issue, often not enough has been done to prepare for it.

This is not just about ensuring the business is still able to operate and trade. It also concerns the wellbeing of staff and their families, and shareholders in the business.

There are four types of cover your clients should consider, depending on their circumstances:

1. Key person

Key person cover protects a business against the loss of one of its key employees through death or serious illness.

When talking to clients, ask how the business would be affected by the long-term absence or death of a team member – an owner, director, salesperson or employee with specialist skills or knowledge. Ask them to make a list of those members. They may be surprised at the length of the list.

This type of insurance covers the key person but the business is the policy owner and pays the premiums. The cover can also be written in trust if needed.

2. Loan protection

Another risk area to a business is where a loan needs to be repaid in the event of the death or serious illness of a loan guarantor. This can represent a serious personal risk where third party security has been taken against the loan, such as a second legal charge on the director’s family home. In this situation, insuring for the full value of the loan in the event of death or serious illness can be vitally important to the wellbeing of the surviving family.

Query with your clients what arrangements they have in place. This could save not just a business, but safeguard a family home further down the line.

Where a director has made a personal loan to the business, which is required to be repaid on death, this is better covered under a key person policy.

3. Shareholder protection

Should a fellow director or partner die, provision should be in place to assure the financial interests of surviving shareholders in the business. The purpose here is to enable the remaining owners to be able to buy the business share from the deceased shareholder’s estate at fair value.

Again, having the appropriate level of cover in place here can both ensure the continuation of the business, and that fair value of the deceased’s holding in the business is transferred into their estate.

4. Relevant life cover

These are individual life cover policies enabling businesses to offer tax-efficient death-in-service benefits to their employees, outside of a registered group life scheme. They are also used for high-earning employees who have substantial pension funds, and want their death-in-service benefits to sit outside of their lifetime allowance.

Other tax advantages of Relevant Life Cover include:

• payments made do not form part of the employee’s annual pension allowance
• premiums aren’t normally subject to income tax
• premiums can be treated as an allowable expense for the employer in calculating their tax liability
• writing the policy in trust will mean that in most cases the benefits are paid free of inheritance tax, because the benefits are paid through that trust

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Helpful Calculators

So that businesses may assess the cover they need, we have developed three calculators to help determine the sum assured:

• Key Person Calculator: to help work out the value of the key person
• Business Valuation Calculator: to help work out the value of a business
• Relevant Life Policy Calculator: to show the potential tax savings of this cover