Business Protection Insurance

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15-02-2020

What is Business Protection & What Does It Cover?

Business Protection is designed to protect an interest in a business, if a key individual or shareholder within the company dies. You can add Critical Illness Cover to your policy to also secure a payout if a key individual suffers a serious illness such as cancer, heart attack or a stroke.

It’s split into three main branches:

  • Keyman Insurance
    Protects against risks such as loss of profits, loss of knowledge, loss of supplier / client goodwill etc. should a key person exit the business through death or critical illness.
  • Shareholder Protection Insurance
    Provides money into the business to buy back a deceased or critically ill shareholder’s shares so the remaining shareholder(s) can retain control of the company.
  • Business Loan Insurance
    Pays off an outstanding corporate debt if an individual key to the successful repayment of the loan dies or becomes critically ill.

Did you know that, according to Legal & General, 53% of the UK’s small businesses think they would cease trading in less than a year if a key employee died or became critically ill and unable to work? Business Protection is there to protect your  company’s future.

Do We Need Business Protection?

The success of almost all small- and medium-sized businesses is dependant upon a few key people 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 indeed any other individual with specialist skills or knowledge essential to the ongoing success of the company.

When many business owners think about protecting their company the first thing that comes to mind is the premises, vehicles and stock.

Nearly everyone has insurance for these, but many forget about their most valuable assets – the people who make the business what it is.

Whatever the individual’s role, their 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
  • Having to find the cash, perhaps from personal wealth, to repurchase an exiting shareholder’s shares.
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The Research

According to the abovementioned report from Legal & General…

  • 65% of businesses had some form of corporate debt, up from 32% in 2011
  • Over half of businesses don’t have any kind of Keyman Insurance
  • 26% of business owners were not aware that a Director’s Loan account needs to be repaid on death
  • Over half of businesses had left no instructions in a will or any special arrangements regarding shares
  • 26% of business owners said they would buy back a deceased shareholder’s shares, with the majority of these saying they would raise funds from personal wealth to do so.

What’s the Risk of Passing Away?

Based on ONS life expectancy data (2012-14), the chances of a healthy male passing away within the next 10 years are as follows:

Age 35
Age 45
Age 55
1 in 62
1 in 29
1 in 12

What’s the Risk of Becoming Critically Ill?

Around 80% of all Critical Illness Insurance claims are made up of the ‘big three’ illnesses – cancer, heart attacks and strokes.

  • Around 1 in 4 new cancer cases diagnosed every year are among people aged under 60 (Cancer Research UK).
  • 50% of people born after 1960 will be diagnosed with cancer at some point in their lifetime.
  • Almost 1 million people in the UK have survived a heart attack and more than 1.2 million people in the UK have survived a stroke or transient ischaemic attack (TIA) – and almost half of these are under the age of 75. (British Heart Foundation).

Not every incidence of these illnesses will be covered by Critical Illness Cover. Less severe incidences may not be included in the wording of your policy or may only trigger a partial payout, so it’s important to check definitions carefully.

Types of Business Protection

Keyman Insurance

Key Man Insurance – also known as Key Person Insurance – is designed to protect the business against the loss of a key person.

This could be anyone from a business owner to key management figures or even simply someone with a great deal of specialist knowledge who makes the business what it is.

It’s designed to provide business continuity in the event of they key individual dying or becoming critically ill (if you’ve added Critical Illness Cover to your policy).

A payout can be used not only to hire and train a replacement key individual, but also to tackle a variety of difficulties the company could face in the wake of the loss of that individual, from a drop in profits to a lack of confidence from clients / key suppliers.

The policy is for the benefit of the business and is therefore usually owned and paid for by the business and underwritten based on the lives of the key people.

Shareholder Protection Insurance

When a shareholder of a business dies, the shares they own usually become part of their estate and are then transferred to the beneficiaries of their estate, typically their family.

This can cause problems when it comes to business succession planning, as the shares could have passed to someone without the aptitude for running a business or even, perhaps, the will to step up and do so.

To retain control of the business, funds must be raised to re-purchase the absent shareholder’s shares.

However, if funds cannot be raised from the remaining shareholders to re-purchase the absent shareholder’s shares, it may lead to the family receiving shares which they look to monetise, perhaps by selling to a competitor.

Shareholder Protection provides those funds by paying out into the company should a shareholder die or become critically ill.

This can also benefit the family / the critically ill shareholder, as it provides them with a ready buyer for the shares.

Business Loan Insurance

If you have an outstanding corporate debt – e.g. a commercial mortgage, funding from a venture capitalist / a lender, a business overdraft, a Directors Loan etc. – it’s worth protecting that debt in case a key person responsible for repaying it dies or becomes critically ill.

An uninsured business loan runs the risk of your company being declared insolvent after your death if it no longer has viable means to repay the loan. That’s why lenders and investors such as venture capital firms often expect this cover to be in place.

In the event of the death (or critical illness, if you’ve added Critical Illness Cover) or a person responsible for repaying the loan, the policy pays out into the business so the loan can be repaid.

How Much Does Business Protection Cost?

The cost of Business Protection depends largely on the amount of cover you need. As with all Life Insurance written on individual lives, each person will need to be medically underwritten for Business Protection, which will involve a series of questions such as:

  • Your health and medical conditions
  • Your age
  • Your lifestyle (e.g. smoking and drinking habits)
  • Your job (riskier occupations tend to cost more to insure).

The below table details the monthly cost of Life Insurance Business Protection and Life Insurance and Critical Illness Cover for a healthy non-smoking individual aged 35, 45 and 55.

They’re looking for £150,000 of level cover (i.e. cover that will remain fixed throughout the policy term).

Age
5 Year Policy
10 Year Policy
15 Year Policy
Life Only
Age 35
£6.21
£7.10
£7.88
Age 45
£10.51
£12.66
£13.73
Age 55
£21.40
£26.78
£33.55
Life & Critical Illness Cover
Age 35
£27.51
£32.56
£35.89
Age 45
£59.38
£72.21
£81.25
Age 55
£130.40
£158.57
£179.15
Premiums correct as of February 8th, 2019
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Common Business Protection Questions...

  • Who is considered a key person for business protection?

    Anyone can be a key person when it comes to Key Person Insurance. They just need to be materially responsible for the ongoing success of the business.

    This can cover a broad scope of people, including:

    • Chief executives
    • Company directors
    • Chief finance officers
    • Sales directors
    • Chief technical officers.

    Essentially, anyone with a major hand in the running of the business whose absence could cause notable financial harm to the business can be covered by Key Person Insurance.

  • What can Keyman Insurance cover?

    The payout from Key Person Insurance can be used for a variety of issues that  may arise with the loss of a key individual, including:

    • Providing a buffer against loss of profits
    • Paying for recruitment and training of a replacement
    • Repaying outstanding loans
    • Loss of important personal or business contacts
    • Loss of confidence from suppliers and customers
    • Difficulties in raising finance for new developments
    • Loss of detailed knowledge of the business’ processes and systems
    • Winding down a company in an orderly fashion.
  • Is Keyman Insurance an allowable business expense?

    The taxation of Keyman Insurance is a complicated question and one that’s best discussed with your accountant and your adviser in tandem to ensure you avoid any pitfalls.

    Generally speaking, however, whether Keyman Insurance is an allowable business expense depends on who is protected and who benefits from the policy.

    For the policy to be a business expense, it must be ‘wholly and exclusively’ for the purposes of trade (i.e. the business is the only beneficiary).

    If you set up a policy designed to cover anyone other than the business — such as a lender or the company’s shareholders (including shareholding directors) — then the policy won’t pass HMRC’s ‘wholly and exclusively’ for the benefit of the business test. For this reason, it’s unlikely that the premiums will be eligible for corporation tax relief.

    By contrast, policies that cover employees are usually regarded as being for the benefit of the business, in which case the premiums should be tax deductible.

    Key Person Insurance policies to protect a business loan aren’t strictly for the benefit of the company; the lender benefits from the policy’s payout, not the business). As such, the premiums can’t be deducted against corporation tax.

    The details above set out the general consensus on how it is taxed however we strongly recommend discussing your specific situation with your accountant.

  • Is Shareholder Protection tax deductible?

    Shareholder Protection Insurance is the most complicated of the three main business protection insurances.

    Unsurprisingly, that means how Shareholder Protection is taxed is also particularly complicated. Essentially, it boils down to who pays for the cover and the individual circumstances of you, your company and your fellow shareholder(s).

    Where the individual pays the premiums themselves the premiums are paid from post-tax income and no tax relief is usually available. The benefit is written into trust for the benefit of the other shareholders, and in the most part protecting the payout from inheritance tax.

    Where the company pays the premiums on behalf of the shareholder on an own life basis which is set-up under business trust, the company is typically able to deduct this payment as a business expense for corporation tax purposes.

    However, the shareholders would have to pay tax on the premiums, as these would be a P11D or benefit in kind.

    Where the premiums are paid under a company share purchase arrangement, these premiums are not typically considered a business expense as they wouldn’t meet the ‘wholly and exclusively for the purposes of trade’ rule, given that the policy isn’t designed to meet loss of profits when the outgoing shareholder dies or becomes critically ill.

    As the company owns the policy and makes the policy payments, as well as receives the benefits, there aren’t usually tax implications for the shareholders.

    As always when it comes to trusts and tax law, it’s best to consult with your solicitor and accountant before putting anything in place that may open you up to a tax liability later on.

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Compare Top UK Business Protection Insurers

Business Protection can vary in cost depending on the provider and the profile of the individual(s) you’re looking to get covered, so it pays to shop around. Below are some of the top insurers in the UK Business Protection marketplace.

aegon

Aegon

  • Maximum entry age: 83 for Life only / 74 for Life and Critical Illness Cover
  • Minimum term: 1 year for Life only / 5 years for Life and Critical Illness Cover
  • Maximum term: 50 years
  • Maximum cover: No maximum
  • Critical illnesses covered: 43, plus 15 additional critical illnesses
aig

AIG

  • Maximum entry age: 86 for Life only / 75 for Life and Critical Illness Cover
  • Minimum term: 3 years
  • Maximum term: 70 years for Life only / 50 years for Critical Illness Cover
  • Maximum cover: No maximum
  • Critical illnesses covered: 41, plus 10 additional critical illnesses
aviva

Aviva

  • Maximum entry age: 89 for life only / 64 for Life and Critical Illness Cover
  • Minimum term: 1 year
  • Maximum term: 50 years
  • Maximum cover: No maximum for Level Life / £5 million for increasing life / £3 million for Life and Critical Illness / £2 million for Life and Critical Illness Cover with Total Permanent Disability
  • Critical illnesses covered: 41, plus 11 additional critical illnesses
legal & general

Legal & General

  • Maximum entry age: 77 for Increasing Life Insurance / 67 for Life and CIC and Increasing Life and CIC / 74 for Decreasing Life / 64 for Decreasing Life and CIC
  • Minimum term: 1 year for Life / 2 years for Increasing Life Insurance and CIC / 5 years or Decreasing Life and CIC
  • Maximum term: 50 years for Life only / 40 years with added Critical Illness Cover
  • Maximum cover: Unlimited
  • Critical illnesses covered: 39, plus 2 additional critical illnesses
royal london

Royal London

  • Maximum entry age: 88 for Life Cover / 69 for Critical Illness Cover
  • Minimum term: 1 year for Life / 5 years for Critical Illness Cover
  • Maximum term: 72 years for Life only / 50 years with added Critical Illness Cover
  • Maximum cover: No maximum for Life / £3 million for Level Critical Illness Cover / £1.2 million for Increasing Life and Critical Illness Cover
  • Critical illnesses covered: 46, plus 14 additional critical illnesses
scottish widows

Scottish Widows

  • Maximum entry age: 79 for Life Cover / 64 for Critical Illness Cover
  • Minimum term: 1 year for level cover / 3 years for decreasing cover
  • Maximum term: 72 years for Life only / 52 years with added Critical Illness Cover
  • Maximum cover: £25m for Life / £5 million for Level Critical Illness Cover
  • Critical illnesses covered: 49, plus 8 additional critical illnesses
vitality

Vitality

  • Maximum entry age: 75 for Life Cover / 60 for Serious Illness Cover
  • Minimum term: 1 year for Life
  • Maximum term: 70 years for Life / 50 years with added Serious Illness Cover
  • Maximum cover: £20 million for Life / £3 million for Serious Illness Cover
  • Serious illnesses covered: Up to 174
zurich

Zurich

  • Maximum entry age: 83 for Life Cover / 69 for Critical Illness Cover
  • Minimum term:1 year for Life / 5 years for Critical Illness Cover
  • Maximum term: 50 years for Life only / 40 years with added Critical Illness Cover
  • Maximum cover: Unlimited
  • Critical illnesses covered: 40, plus 2 additional critical illnesses

Get Business Protection Quotes & Expert Advice

Business Protection is more complicated than personal protection for a number of reasons, not least because of the variety of ways it’s paid for and taxed depending on the product that’s right for you.

Why Speak to Us?

We started Drewberry because we were tired of being treated like a number and not getting the service we all deserve when it comes to things as important as protecting our health and our finances. Below are just a few reasons why it makes sense to talk to us.

  • There is no fee for our service
  • We are independent and impartial
    Drewberry isn’t tied to any insurance company, so we can provide completely impartial advice to make sure you get the most appropriate policy based solely on your needs.
  • We’ve got bargaining power on our side
    This allows us to negotiate better premiums for you than you going direct yourself.
  • You’ll speak to a dedicated expert from start to finish
    You will speak to a named expert with a direct telephone and email. No more automated machines and no more being sent from pillar to post – you’ll have someone to speak to who knows you.
  • Benefit from our 5-star service
    We pride ourselves on providing a 5-star service, as can be seen from our 2766 and growing independent client reviews rating us at 4.92 / 5.
  • Benefit from the protection of regulated advice
    You are protected. Where we provide a regulated advice service we are responsible for the policy we set-up for you. Doing it yourself or going direct to an insurer won’t provide this protection, so you won’t benefit from these securities.
  • Claims support when you need it the most
    You have support should you need to make a claim. The most important thing when it comes to insurance is that claims are paid and quickly. We are here to support you during the claims process and make sure it’s as smooth and stress free as possible.
Tom Conner Director at Drewberry

We deal with companies ranging from small startups to multinational corporations with millions in turnover so we are well equipped to help.

Please don’t hesitate to pop us a call on 02074425880 or email help@drewberry.co.uk.

Tom Conner
Director at Drewberry

The staff has been very knowledgeable and I have enjoyed working with Nadeem on setting up our plan.

Kim S
22/06/2020
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