Our relationship with a new client often begins with arranging their mortgage, as this is when most people seek guidance from a financial adviser.
Many of these clients are business owners. It is an unfortunate truth that protection arrangements between the Shareholding owners and directors of a business are minimal, if not completely non-existent.
There are, at the very least 4 main areas that business owners should be concerned about.
Key man Insurance – The clue is in the title.
If the owners or a key employee were to die, what would be the impact on the business cash flow?
Whether, Sales, Marketing, Strategy or any other key area, the loss of an individual will often have a detrimental effect on the profitability of the business.
Key man insurance pays a lump sum into the business to compensate for any decline in profitability and to help recruit and train a replacement.
The death of a shareholding owner of a business, without appropriate agreements and insurance in place, will normally lead to the deceased’s next of kin/partner inheriting the shares.
A possible consequence of this event is that the remaining shareholders, not only have to deal with the emotional loss, they also have to deal with a new and unknown business partner who has no knowledge of how the business operates. A correctly constructed shareholder agreement will ensure that:-
The beneficiary of the shares is obliged to sell the shares back to the remaining shareholders at a price determined by pre agreed formulas/professionals.
This is achieved by ensuring that an insurance policy, written in Trust, on the deceased’s life compensates the beneficiary for giving up their inherited shares.
Using trusts can also separate the shares and profits from the company and the beneficiaries’ estate. This would be good tax planning!
Death in Service
Large companies often have a group insurance life policy that provides beneficiaries a sum on money based on a multiple of their salary; normally this is in the range of
1-4 x salary.
Directors and key staff can access greater protection, often in the region of 15-20 x salary. Such benefits are HMRC approved and Directors can put in place a group life Assurance policy for themselves and nominated members of staff.
The policy is owned by the company and premiums are paid for by the company, Such policies are not treated as a benefit in kind. The premiums can be treated as a business expense. Apart from being tax efficient, these benefits are good for staff morale and should provide an incentive when recruiting new staff.
This is another product that can be designated as a company benefit, where the monthly premiums are fully tax deductible, it has no P11D effect, engenders staff loyalty and can also aid recruitment.
It compensates the employee if he/she has a long term illness and replaces up to 75% of the agreed/insured income which is then taxed at the claimant’s appropriate rate of tax.
For more information on Business protection please contact us 0n 020 8441 2605 or 01442 232 272. Alternatively click here for our enquiry form.