Types of Business Protection
When many business owners think about protecting their company the first thing that comes to mind is the premises, vehicles and stock but is this where business protection begins and ends, what about your most valuable asset?
In a recent study by Legal & General over 70% of those surveyed had four key people or less within the business showing how vulnerable SMEs are and how vital it is to protect those individuals in the event of death or serious illness.
Business protection takes three key forms; protecting profits, corporate debt and ensuring the shares of a deceased business owner can be purchased.
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Keyman Insurance also known as profit protection is essentially a life insurance or life insurance with critical illness policy written on the life of the individual but owned by the business. Any premiums due are paid by the business and thus should a claim arise the benefit payment is made to the employer.
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Shareholder Protection is designed to pay a benefit in the event of the shareholders death. The benefit payment provides the remaining shareholder(s) with a means of buying the deceased owner's share of the business from his or her estate.
- Loan Protection is designed to help the business pay any outstanding borrowings such as a loan or commercial mortgage should the individuals covered die (Life Insurance Only) or a specifice critical illness (Life Insurance and Critical Illness Cover).
Why Protect Your Business?
The success of almost all small and medium sized businesses are dependant upon a few key persons and the loss of such a person can often mean the beginning of the end for the business. These key people can include the business owners, sales directors or any other individual with specialist skills or knowledge.
Whatever the individuals role, there loss can reach beyond just the cost of recruiting and training a replacement including.
- Loss of profits
- Loss of important personal or business contacts.
- Loss of confidence from suppliers and customers.
- Loss of detailed knowledge of the businesses processes and systems
- Having to repay a loan the key person has made to the business
- Difficulties in meeting existing loan repayments
The Research
A 2011 study by Legal & General carried out with the Institute of Directors took place to understand the security of assets, shares and cash flow of businesses with some of the highlights detailed below.
- 95% of businesses had at least one key individual.
- 43% of businesses had unprotected corporate debt.
- 38% of business owners expected their business to fold within 18 months of the death or critical illness of a key person.
- 33% of businesses had no form of share protection.
- 58% of businesses had no formal agreement to establish what would happen in the event of the death or critical illness of a business owner.
- 70% of businesses had not reviewed their company agreements in the last year.
Keyman Insurance
Key person insurance is fundamentally a very simple protection product. The policy is designed to allow a business to insure it's key people against the risk of them being unable to work due to suffering a critical illness or worse case in the event of death.
The benefit payment to the business in the case of such an event would provide the necessary cash injection to make sure it survives.
Shareholder Protection
If one of the owners of a limited company becomes critically ill or dies and the remaining owners do not have the funds or the option available to buy their shares, there are a multitude of issues that could arise.
In such an event a shareholder protection policy can provide a sum of money to the remaining business owners sufficient to help them purchase the individuals share of the business
Business Loan Protection
Business loan protection is designed to help a business pay any outstanding borrowings such as a loan or commercial mortgage should the person covered die or become diagnosed with a specified critical illness. Loan Protection is either set-up as a life insurance only or a life insurance and critical illness policy paid for by the businesss.
The policy itself is written on the key individual so in the event of death or a critical illness the benefit payment can be used for any outstanding debt or loan.
Loan protection should be set-up to reflect the terms of the borrowing and can be structured as either a level term or decreasing term plan.