Insurance can cover you against mistakes, accidents, theft, damage and legal fees but what if you were to lose your top salesperson who was responsible for generating 75% of your income due to sickness or death? What would happen to your partners share if they unexpectedly passed away? If one of your staff passed away, how would their family cope without their income?
The only type of cover that is mandatory under UK law is employers liability insurance which is a legal requirement for most businesses that employ staff, even on a casual basis.
Regulated bodies may require you to have certain types of insurance to operate. This means that those insurances will be mandatory to protect your business for particular professions. Solicitors, accountants and some healthcare professionals are required to have indemnity insurance.
Even if you find that there is no compulsory insurance for your particular business, it’s worth considering different types of cover to ensure you can keep your large or small business going if things going if the worst were to happen, which would inevitably be detrimental to your business.
Business Health Insurance ensures your employees are able to make a speedy recovery by receiving prompt medical treatment.
Group Life Insurance provides a financial lifeline in the form of a lump sum payment to your employees loved ones should they pass away
Group Income Protection provides your employees with a percentage of their monthly income should they suffer long term illness.
Key person insurance can also be known as key employees insurance or key man insurance. It is designed to protect businesses against financial loss when someone who is key person to the company’s operation dies or becomes unable to work due to ill health.
The key man, key person or key employees insurance will pay out a cash lump sum on the death of the named key person, as the loss of this key person would have a financial impact on the company. Some providers may offer this on a critical illness basis too.
The business takes out key person policy on the key employee. The business pays for the premiums and is the beneficiary of the insurance policy in the event of a claim being made. If the insured employee dies within the term of the policy (or is diagnosed with a critical illness if this is also insured), the company will receive the payout.
Your business success requires your stakeholders’ confidence, from customers to suppliers, bank managers, and employees, so losing a key person will often significantly impact that level of confidence. The benefit of receiving an injection of cash from key person cover into your business can help it to survive short term giving owners time to take steps to maintain confidence from your clients in the longer term.
So who are the key people in your business? This decision is down to you as a business, and only you can decide if a person is key to the running or performance of your business. It could be a person who brings large revenue streams into your business, is integral to the profile of your business, or is a key decision-maker behind the scenes. If this person’s absence death or critical illness affects your business needs and operation, they can be covered by key person insurance.
Small business owners are far more likely to have one or two significantly important people who the business relies on to succeed. Key man insurance is often overlooked by small businesses who tend to need it most, as loss of a key person would significantly disrupt the business proceeds.
For example, small businesses are more likely to have an involved founder, without whom ideas and crucial leadership would be lost. The loss of such a person could damage the ethos of a young business which may not have the resilience to sustain the blow, without a financial boost of this form of business protection insurance, to help cushion the way to safe, profitable ground.
Key man insurance provides financial assistance to get a business through a period of uncertainty in the aftermath of unexpectedly losing a key member of staff. It may only be money, but that money could ensure your business can continue to operate following the loss of an important member of the team, which would include one of the business owners.
Key people inside a business might include:
The founder: you, or the person who devised the business and got things off the ground in the first place.
Office manager: crucial in running the day-to-day operations
Technology guru: if you rely on a website to drive sales to your business, without your developer your business could lose its main route to profitable business opportunities
Top salesperson: if there’s one person the business relies on to bring the business through the door and make it stick, this person is key to the profits of the business
Each individual shareholder can take out separate life cover for themselves. This insures them for a lump sum equivalent to the value of their company shares. They can write this into trust to benefit their co-shareholders as the beneficiaries.
Shareholder protection allows business owners to buy shares back from any partner who is diagnosed with a critical or terminal illness, or in the event of death. This policy helps surviving owners stay in control and minimises disruption to the business.
Dealing with ownership in a company can be difficult in the event of an untimely death or illness.
A shareholder arrangement sets out how the shares should be valued and gives the surviving shareholders the right to buy the shares, or the outgoing shareholder the right to sell.
Dealing with the loss of company directors or key shareholders in any business can be very traumatic, even more so with added disputes on how the company might carry on. If an owner passes away without shareholder protection in place then that owners shares would pass to their estate. The insurance protects a business owner and their investment in their company and pays a lump sum to their beneficiaries whilst ensuring the remaining shareholders can keep control of their business.
Any life cover you set up must be aligned with the Articles of Association and the shareholders’ agreement. There may also need to be a trust and/or buyback document in place, for them to be effective.
Each individual shareholder can take out separate cover for themselves (known as an ‘own life’ policy). This insures them for a sum assured equivalent to the value of their company shares. If they choose to, they can write this into trust to benefit their co-shareholders.
You may also need your shareholding clients to enter into an explicit agreement that if one of them dies, the remaining shareholders can buy their shares from their personal representatives.
They can also agree that if one of them suffers a critical illness, the affected shareholder can choose to sell their share. If they decide to do this, the remaining shareholders must buy it.
Any policies you set up must be aligned with the Articles of Association and the shareholders’ agreement. There may also need to be a trust and/or buyback document in place, for them to be effective.
Business loan insurance provides a cash lump sum to repay an outstanding company loan to ensure business continuity in the event of death or critical illness of a key employee or shareholder.
Your client can protect the full loan or mortgage amount with life cover, or life and critical illness cover. When they make a claim, a cash lump sum assured is either paid to the business or directly to the lender if the policy has been assigned.
Many businesses take out business protection insurance to cover loans to start up a company or to expand their operation. And their ability to repay often rests on a few key people or shareholders. Business protection insurance helps to pay an outstanding loan if any of those key people were to become critically ill or die.
Business loan protection can be used to protect:
Relevant Life Insurance is an individual Life Insurance policy designed to replicate Death in Service for a single employee where there are not enough members to warrant a group life insurance scheme. The Relevant Life Insurance Policy is owned by the Business.
Like a standard life insurance policy, these products pay out a lump sum to the insured person’s beneficiaries on the death of the insured. .
The amount a life policy pays out is based on the multiple of the employee’s salary. It will be the businesses decision how much the life policy will be and will pay out on death or terminal illness. An insurance advisor will be able to guide.
Some plans, known as ‘level’ life policies, are for a set lump sum amount agreed when the insurance was purchased while others are linked to inflation. It is also possible to have guaranteed increases of life cover written into the terms, to cover larger mortgages or pay rises in the result of death.
Relevant life insurance policies are not treated as a benefit in kind, so no income tax is payable, nor are they subject to inheritance tax. Adding to their tax-efficiency, businesses can also declare the premiums as a business expense to lower their corporation tax bill.
Who Can Have Relevant Life Cover?
You can apply for relevant life insurance cover for one or more of your employees if they are.
The following generally cannot be covered by a relevant life insurance policy…
Employees can only be insured with relevant life cover if they work for the business in a PAYE capacity and are a UK resident.