Financial Planning to protect the Business – Every Business Matters
Running a business is difficult at the best of times. Acquiring and keeping customers is what we do.
However, the unforeseen and the unlikely can happen to all of us in business. Financial Protection for businesses can ensure that our business survives and prevents losses being more than they otherwise could be. It enables a business owner to continue operating. It therefore ensures work for employees and to continue to profit from operations.
Business Protection can provide financial security for the business in the event that the life assured dies or suffers from a critical illness.
In this event:
- the business can suffer because any debts can be recalled by creditors due to loss of confidence in the business.
- the business may lose major accounts and therefore sales if the person is seen as an important one in the relationship or business.
- shares may be passed on to family members, with no experience, knowledge or understanding of the business, yet an expectation of a share of profits.
Business Protection life assurance policy will enable the business to pay off debts. It will create a financial buffer to replace loss of profits and buy out beneficiaries of shares. This will maintain share ownership in the remaining shareholders hands.
The Main business Protection Plans
Key Person Protection
Is financial protection for loss of profits if someone who is essential to the profitability of the business dies or suffers a critical illness. This could be sufficient to protect against lost profits. It is also used to recruit and train a replacement and help the business back to profitability.
Business Loan Protection
Any borrowings, including loans, mortgages or other liabilities and Directors Loan Accounts should be covered to ensure that these debts are repaid. If the person covered dies or suffers from a critical illness.
Without paying off these debts a business may become insolvent. Even a Directors Loan could cripple a business if the widow or family make a legitimate claim against the business. The sum assured can be paid to the business or directly to the creditor.
If a shareholder in a PLC, member of a (LLP) or partner in a partnership dies their shares are available to buy. Is it affordable? if not, there could be significant implications for the future of your business.
Share protection can help protect the ownership of businesses in this situation.
Share Protection allows the remaining partners, shareholding directors or members to remain in control of the business following the death of a business owner. A lump sum could be used to help purchase the deceased partners/shareholding directors/members interest in the business.
If a business owner dies with no share protection in place his or her share in the business may be passed to their family. This means that the surviving owners could lose some control or indeed all of the business. The family may choose to become involved in the ongoing running of the business or could even sell their share to a competitor. A share protection policy can help avoid these issues.
Life Insurance for Businesses
A Relevant Life Plan is a term assurance plan available to employers to provide an individual death in service benefit for an employee. It’s designed to pay a lump sum if the person covered dies or is diagnosed with a terminal illness, whilst employed during the policy term. A Relevant Life Plan is paid for by the employer as a business expense, it is not a benefit in kind and is paid to the beneficiaries by way of a trust.
A Relevant Life Plan is for Employers looking to provide ‘death in service’ benefits, but with too few employees to set up a group scheme.
It can also give Directors wishing to provide their own individual ‘death in service’ benefits without taking out a scheme on all employees.
With normal company death in service plans, in the event of a successful claim, the death in service benefit is paid out to the deceased’s beneficiaries. Death in service schemes are subject to rules of registered pension schemes. The maximum amount that can be paid out before a tax charge becomes due is currently £1.25m, and £1m with effect from April 2016.
Those approaching retirement with larger salaries and pensions funds should therefore certainly look at their current arrangements.
Relevant Life Plans are not available where there is no employer/employee relationship. For example, sole traders, equity partners of a partnership or equity members of a Limited Liability Partnership.
What makes it cost effective?
Relevant Life Plans are similar to most other types of life cover except they aim to provide a tax efficient benefit provided by an employer for an employee.