Business protection is an umbrella term used for insurances funded by a business to protect itself, it’s directors/key employees and their families against the financial implications of death or long-term/critical illness. There is blanket coverage available for all staff of a business (usually referred to as ‘group’ cover) that we will write about at a later date.

Many business owners are unaware of the existence of business protection until it is either discussed with them by a professional contact (think accountant, financial advisor or solicitor), or it is needed.

There are four main types of bespoke business protection :

Key Person Insurance

Executive / Key Person Income Protection

Shareholder Protection and Cross Option agreement

Relevant Life Insurance

For more detail on each of these insurances please visit our online guide by clicking here . The following case study highlights how these insurances work in practice and their approximate costs.

Business Protection in Practice – The case of ‘Finch LTD’

Steve Jones is the Managing Director of Finch LTD, a private limited company. Finch LTD is now the ‘go-to’ construction company in the East Midlands. Sales revenues are strong and increasing year-on-year; much of this is down to the effort and input of Mark Smith, Finch’s Sales Director. Over time, Mark’s skills, network of contacts and rapport with potential introducers and clients have helped to take contracts from the larger, household-name construction companies. His most recent successful pitch has secured a contract that will guarantee Finch’s expansion for the next three years.

Steve (the MD), is confident with the help of recently agreed finance with the bank and continued input from Mark, the company and it’s 22 staff members can look forward to a rewarding and profitable future.

In 2018, Mark died aged 41 after a 9-month battle with a critical illness. Steve’s first thoughts had been with Mark’s family;

How must they be feeling?

Can they afford to live on the sick pay provided by the company?

Will they be ok financially in the long-term?

Steve then started to consider the financial implications of Mark’s illness and death on the future of the business.

What if the most recent contract is now in jeopardy without Mark’s enthusiasm and skills to manage the account?

To many people Mark is the company - will his death mean loss of sales and existing accounts?

Loss of sales will have a detrimental effect on cash flow, profits and turnover. What happens if the bank loses confidence in the company and decides to call in the recent loan?

Mark held shares in Finch LTD – how can the company afford to purchase these back from his family at a time where revenue is already down?

Luckily, prior to Mark’s illness, Steve’s financial advisor asked these questions and recommended that the business takes out protection -

Key Person Income Protection paid £4,000pm into the business after Mark was ‘signed-off’ for 6 months and therefore on statutory sick pay, allowing Finch LTD to use their discretion to top-up this sick pay and using the remainder to cover the short-term dip in revenue caused by his absence. This cover cost £62pm*.

Key Person Insurance paid a lump-sum of £400,000 into the business upon the death of Mark to cover loss of profits and repay the bank loan in the short-term, and recruit Mark’s replacement longer-term, ensuring the survival and prosperity of Finch LTD. This cover cost approximately £32pm.

Relevant Life Insurance paid a tax-free lump sum of £200,000 to Mark’s family on death giving them some financial breathing room. Mark died without personal mortgage cover; his widow used the tax-free Relevant Life Insurance proceeds to settle their outstanding debts (mortgage, credit card and car finance), and used the remainder to take time away from work to support their children. This cover cost £15pm.

Shareholder Protection provided Finch LTD the funds to purchase Mark’s shares back from his family at a value (£200,000) that was fair for both parties, with a cross-option agreement to ensure the transaction was smooth and logical. Mark’s widow used the money she received for the shares to put towards her retirement and savings to ‘set up’ their children for the future. This cover also cost £15pm.

The total monthly cost to Finch LTD for this vital financial protection was £124 (before any effective tax relief). *Quotations based on a healthy male, non-smoker, aged 41 at time of writing (May 2020), all cover written until age 60 with 6-month deferred period on income protection.

If you own, direct, or are a ‘key person’ within a business, I would welcome the opportunity to review your existing cover or discuss any shortfalls you may have (working with your existing accountant where necessary). We are truly independent advisors, meaning that, if we were to recommend any protection, we obtain quotations from over 30 providers to ensure you have the most suitable, comprehensive, and affordable coverage.

In addition to discussing cover levels and providers, we factor in the taxation and structure of policies and premiums, with strong links to specialist accountants and solicitors that can also be of assistance in this field. Please email me at [email protected] or call on 07702867356 to arrange an initial, no cost discussion.

With thanks,

Tom Sykes

‘Protecting your business in 2020’ by Tom Sykes of Integrity Wealth Solutions

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