Businesses across the UK are exposing themselves to very serious financial risk by not having adequate protection insurance in place, such as Shareholder Protection, Key Man Protection, Death in Service (employee term insurance) or Relevant Life. The estimated gap is around £683 billion, 60% up on recent years.
It is startling that studies have revealed around 45% of UK business owners expect the surviving shareholders (partners) to buy their share of the business in the event of death, BUT only around 40% of businesses have actually taken out cover to facilitate such a purchase! Over 1 million small businesses could be at risk commercially through one of the business owners (shareholders) unexpectedly dying, or a key person dying or becoming ill. Over 35% of companies have stated that they have not reviewed their partnership agreement or company incorporation since the business started. Many businesses when starting up, do not budget for protection insurance or review this once established – probably one of their biggest oversights with potentially catastrophic commercial consequences.
Here are some options for protecting your commercial business interests if the unthinkable happens;
Share Holder Protection is extremely valuable to any business ensuring a cash lump sum is available in the event of one of the directors dying, enabling the remaining business owners to buy the deceased shares and retain control of the company. When a company director dies their shares would pass to their next of kin – normally a spouse or life partner or children. If the remaining shareholders do not have shareholder insurance in place, with a cross option agreement or the funds to buy the deceased shares, the deceased shareholders family could sell the shares on the open market or to a business competitor. This could create serious problems for the business going forward.
Key Person Insurance is also important for key members of the 
business – usually the founders or possibly a key employee or two. These will be people who are vital to the business and whose absence could destroy the company. Key Person insurance is where the company purchases a life and optional critical illness insurance policy on its key employee(s) The Company pays the premiums and is beneficiary of the policy. If the insured key person unexpectedly dies or is diagnosed with critical illness the company will receive the cash lump sum and the proceeds can be used to pay off debts or keep the company afloat while the company is restructured. The cash could be used for a replacement person and meeting expensive recruitment costs – taking into account the need to attract the right personnel, with possible relocation costs needing to be covered for that person along with a possible golden hello and other related expenses.
Relevant Life Insurance is a very tax efficient way of establishing term life insurance in place for employees and employed directors. The policy is designed to pay a lump sum if the employee dies or is diagnosed with a terminal illness. This is also good for high earning employees where death in service does not form part of their life time pension allowance. A majority of company directors have some form of personal life insurance and are paying for this either personally or through pre-taxed income or through their company attracting a P11D benefit-in-kind. A higher rate tax payer can save 49% and for a basic rate tax payer the saving is around 36% by taking a relevant life policy and letting the business pay the premiums. The policy would be written in trust and no benefit in kind is payable.
Kevin Bates is an Independent Insurance Consultant and Director of Ashford based Medic Healthcare