BUSINESS PROTECTION

BUSINESS PROTECTION

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It’s easy to forget, but people are a business’s biggest asset! Just like a piece of expensive equipment, or a large sum of money, if key members of the business are out of action this can have a huge impact on a company. Large or small, profits, sales and customer relations can quickly suffer as a result of the loss of a key individual. It’s not easy to think about, but when a key member of a company becomes ill or passes away, the business needs help.


It is critical at a time like this that there is a level of business protection in place, that funds become available for a company to minimise the negative impact of the loss. When a key person is no longer available, the company needs a replacement. It can take time and money to recruit a suitable individual to take their place. Furthermore, banks or creditors can often panic and recall loans in order to shield themselves against the potential failure of the firm. This is often all happening alongside the normal business outgoings such as payments to suppliers - not an easy task for a company in crisis. Many firms do not make it through these difficult times.


For this reason businesses need safeguards. That is why business protection insurances should be explored by firms - they act as a safety net necessary to help the business recover.


There are 3 main types of business protection:


Each of these will be explained below.


Key Person Insurance


Also known as ‘Key Man’ insurance, this business protection is essentially life insurance taken out by a firm against the death, or serious illness of a key individual within a company. In a small business this could be an owner, or the day-to-day manager, without whom the business would grind to a halt.


The key individual will be named on the policy, but the company will be the beneficiary of a tax-free pay-out which can be used to fund recruitment, help with paying bills, and any other short term costs. It’s easy to imagine the ramifications on the business if these key members of the business could no longer work, and key man cover provides the comfort blanket necessary to protect it.


Key man cover is particularly necessary as a small business insurance method, but there are scenarios that do not require it, such as if the key individual is the only employee of a company. This type of insurance is designed to benefit the company, and not the family of the owner. Therefore in this situation, a personal life insurance policy, in the case of death, or income protection insurance, for injury or disability, would be more appropriate.


There are insurance policies available for all budgets with a range of tax-free pay outs. When looking for a policy a company must assess its likely short term needs during a time of crisis.


Shareholder Protection


If a shareholder or part-owner of a business dies, there are range of possible outcomes for a business. Families of the shareholder may need to cash in the shares, and fellow shareholders may see this as an opportunity to increase their shares. In this situation, due to the cost of doing this, other shareholders may not have the funds available to purchase these shares, and this is where shareholder insurance steps in.


This insurance runs alongside of a series of agreements called ‘cross-option’ agreements that determine how shares should be distributed in the event of the death of a shareholder. The tax-free pay-out is designed to ensure the remaining shareholders have the money to purchase the shares from the deceased shareholder’s estate in this event.


The benefits of this insurance are numerous:


  • Financial stability for the firm - Shares on the open market are potentially a gateway for new investors to buy in or family members to step in, which can lead to instability and uncertainty for the remaining shareholders. This is something shareholders normally wish to prevent as it may result in a loss of control. Having the cross-option agreements in place and the funds available to purchase the shares means this kind of shake up can be avoided.

  • Peace of mind for families - the families of shareholder can be put at ease knowing that they will inherit the value of the shares rather than be stuck with an asset that may be illiquid. Instead they will receive tax-free cash sum which may be more useful and easily distributed.

  • Comfort in times of illness - an agreement set out prior to any illness or death, means that shareholders have the peace of mind that should a situation arise, there is already a plan in place.

Loan Repayment insurance


When a key person in a business passes away, this may also affect the business’s ability to make repayments on any loans. Creditors, including the company’s bankers, may become nervous and call in debts immediately. Some lenders require a company to take out loan repayment insurance to protect themselves against this situation but even if a lender doesn't make it a requirement of a loan, it is sensible to protect the business against the possibility of this happening. Failure to repay loans may not only cause a business to go under, but also increase debts due to interest rolling up. This is something business owners and shareholders are likely to want avoid at all costs, therefore this type of business insurance is often the only safeguard against this risk.

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