What is Business Protection?

Business Protection covers four different types of insurance;

  • Loan Protection
  • Keyman Insurance
  • Relevant Life Insurance
  • Partnership or Shareholder protection

Many insurance companies offer specialist insurance for businesses. Insurance for a business differs from a personal plan as the business plans are able to take advantage of tax laws and have different definitions on critical illness so that the plan is built and customised for the business owners. The business plans also have specialist trusts set up to deal with the common concerns that business owners may come across. Please contact a Proadvice adviser today to discuss the options that may be suitable for you and your business.

What is Business Loan Protection?

Business Loan Protection is a protection plan taken out so that a business can repay money owed in the event of diagnosis of a critical illness or the death of a Director or key person within the business; Business Loan Protection will cover the businesses outstanding borrowings. A Directors loan account is required to be paid off on death and a Business Loan Protection plan can ensure that this is the case and that the loan can be repaid immediately.

What is Keyman Insurance?

Keyperson, (or Keyman as it is referred to), is a policy which will protect your company should you lose a key worker due to illness or death. The futures of many companies are tied in and reliant on a few key individuals within the business who bring in the contracts and close the deals that keep the business ticking over. 

Anderson Rules

Sir John Anderson, who was the Chancellor of the Exchequer set principles, rather than rules, in a statement made in 1944 that form the basis on which local Tax Inspectors can decide whether premiums for keyperson cover qualify as an allowable business expense.

  • The purpose of the policy is to solely protect loss of profits
  • The sole relationship is that of employer and employee
  • The plan must be a short-term assurance
  • The sum assured must be reasonable.

Relevant Life Cover

I am sure you, like most people feel as though you pay too much tax already? What if I could tell you there is a way the tax man could help pay for your life cover? If you are a Company Director, a high earning individual where death in service does not form part of your lifetime allowance or are looking to provide death in service for your staff but have too few employees to qualify, then the Relevant Life Cover may be suitable and what you may have been looking for.

The premiums will not be subject to income tax or national insurance for the employee and with no employers national insurance and the possibility of corporation tax relief on the premiums the business benefits too. 

It is generally agreed that at this moment in time that the economy is tough. Irrespective of whether your company is doing well and on the up, you will not have money to waste and by taking out a Relevant Life Plan policy, this allows you to take advantage of the tax allowance, helping you to save money.

The Relevant Life Plan is also a great way of keeping your key workers happy. It allows employers to provide employees with an individual death in service benefit without the employer having to take out a group life insurance plan.  

Why use Relevant Life Insurance?

Relevant Life Insurance works like a death in service benefit. If you own your own limited company, you can get the tax man to help pay for your life cover. Relevant Life Insurance cover is ideally suited to companies with not enough people to warrant a group life insurance plan scheme. Other key advantages to Relevant Life Insurance cover are;

  • The benefits will not form part of the employee’s lifetime pension allowance
  • The payments made will not form part of the employee’s annual allowance
  • The payments employers make are not subject to income tax
  • Payments can be treated as an allowable expense
  • In most cases the benefits are paid free of inheritance tax

Information regards taxation levels and basis of reliefs are dependent on current legislation, individual circumstances are not guaranteed and may be subject to change.

What is Partnership /Shareholder protection?

Shareholder Protection is an agreement that ensures that a business has enough money and the ability to buy the shares of a deceased Director/Partner off of their family in the event of their death. Shareholder Protection is also known as a Cross Option Agreement or Partnership Protection.

How does Partnership /Shareholder protection work?

Mr Jones and Mr Smith incorporate a business together. The business is doing very well and after five years the company is now worth £500,000. Mr Smith suddenly and unexpectedly passes away and his shares now go to Mrs Smith and the children. Mrs Smith and the children have no idea how to run the business or even the desire to do so. 

In an ideal world, Mr Jones would buy the shares back from Mrs Smith and the children for £250,000, half of the company’s value. This will give Mr Jones full control of the business.

If the company is not cash rich this could lead to a problem. Mrs Smith might decide to sell the shares to Mr Andrews who runs a rival company as Mr Andrews has offered more money for the shares and all Mrs Smith wants is the best deal to enable her to look after her family.

Mrs Smith may decide she will attempt to run the company. Mr Jones and Mrs Smith are friends but had never contemplated working together. 

The Share Holder Protection plan ensures that there is a lump sum available to Mr Jones to cover buying back the shares in the event of a partner’s death. The Share Holder Protection plan runs alongside a cross option agreement ensuring that the shares go to the right people.  

The plan ensures that;

  • The remaining partner/s keep control of the business and the shares
  • The agreement ensures that all transactions are tax efficient
  • The family of the deceased member are properly compensated
  • The company continues to run with minimal disruption

What is a Cross Option Agreement?

A Cross Option Agreement is an agreement that ensures that a business has enough money to buy the shares of a deceased Director/Partner from their family in the event of their death. This is also known as Shareholder Protection.

When a business is set up one of the main aims is often to make a profit for the business owner and their family. If the business is in fact a partnership then in the event of one of partner’s death, the shares are normally passed to the deceased’s surviving family members and not to the remaining business owner/s, after all the deceased wanted to ensure that if anything happened to them, their family would be protected. 

This could now mean that the business can be run by unconnected parties, (i.e. the deceased’s family) and this can have a severe impact on the business and the family left behind and could also leave both parties unhappy with their circumstances. If the company has the money available then they could offer to buy the shares from the family of the deceased, although many companies may not have the cash available to deal with this situation and this can put a significant financial strain on the business.

The Shareholder Protection Plan is a policy that ensures that on the death of a business partner, a lump sum will be paid out to the company to the value of the deceased’s shares and the money will then be used to buy the shares from the deceased’s family. The shareholder protection option does not force the sale of the shares.

By adding double option onto the shareholder protection this does force the sale of the shares by either side, (the family and the business). This ensures that the family are looked after and properly compensated and in addition to this the business can continue to run with minimal disturbance to the business’ day to day operations. It is recommended to have the business valued before opting into one of these plans and then to continue with regular reviews to establish that the valuation is still realistic in the current climate and to ensure that both parties are aware of the insurance entitlement, should the worst happen.

Group Income Protection

Group income protection is designed to provide a company with sick pay for its employees. Group income protection provides financial security for the workers, in the event of them becoming sick or injured and unable to work. Group income protection plans are known for their flexibility and the ability to adapt, no matter what the companies requirements may be. 

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