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Ask the Experts at Cowgills
How to protect your business if the unforeseen happens
14th October 2019, 2:47 pm
Many SME businesses across the UK take time to consider employee benefits or pension schemes, yet when it comes to the business itself, underestimating the loss of shareholders or key personnel can have a catastrophic impact.
Here are our top tips to consider when it comes to protecting your business.
- Protecting against the loss of a key person
If a key person in a business dies or becomes critically ill the loss can have a severe impact and a devastating financial effect. The business could suffer badly, with sales and profits falling and increased workloads for the remaining staff.
Key Person Protection is designed to pay out a lump sum to help the company survive the blow of losing that person who had been instrumental in making the business work.
The lump sum can then be used to help replace lost profit or finding and hiring a replacement.
According to research conducted by Royal London, whilst 3 in 10 SMEs have experienced the loss of a key employee for 3 months or more due to a serious illness or death, only 26% have this type of cover and 51% don’t view it as important.
People are the most valuable asset of any business, but SMEs are more likely to insure their premises and stock than their key people.
The loss of a key person in a small business has been known to cause the immediate death of that company and senior decision-makers at SMEs should seriously consider whether this type of cover is required to protect the future of their business.
- Shareholder Cover
More issues arise if an owner or shareholder of a business passes away or is critically ill.
Shareholder protection is designed to help avoid the uncertainty of what will happen to a shareholder’s holdings. Without protection and a policy in place, a deceased business shareholder’s shares would pass to their estate, leaving it to the beneficiaries to decide and influence the direction of the business and what to do with their holdings. At the same time, remaining owners and/or shareholders may want to purchase shares but may struggle to raise the funds.
If an owner or shareholder happens to be seriously ill, shareholder protection can allow for the person to sell their stake to others to ensure the operations of the business can carry on.
Putting in place a shareholder agreement outlining what happens if an owner/shareholder passes away or is critically ill and investing in a shareholder protection policy to provide funds so the remaining company stakeholders can purchase the equity of said owner/shareholder, will diminish all this stress if the unforeseen should happen and will also mean the deceased shareholders family have peace of mind and ensure the business can return to normality without too much disruption.
- Relevant Life Cover
Many directors of businesses establish life cover policies for the protection of their families and tend to do it in one of two ways. They can pay for the premium personally, out of taxed income, or they can put the cost through the business and suffer the P11D implications.
An alternative to this is using a relevant life policy which is effectively a one person in death service scheme.
One person in death service scheme allows the individual to put the cost of the premium through the business, but it is not deemed as a P11D benefit. This means that the cost is paid for out of gross as opposed to net income, giving rise to a significant cost saving.
There are restrictions around these types of policies but in many circumstances individuals can benefit from significant cost savings.