Covid carnage highlights business protection gaps – Birmingham Post article 12.08.2021

We’ve all gone through a really tough time through the pandemic with lives lost and many people’s finances stretched.

It has been exactly the same for business and it has served as a warning for the future.

The Personal Finance Society noted: “Undoubtedly the last 12 months will have been an extremely challenging time for thousands of businesses, large and small.

“Businesses have had some financial support in the form of government backed recovery loans, grants and the furlough scheme. The measures, necessary given the circumstances, highlight the need to have a financial safety net in place and access to sufficient funds in an emergency.

“Whilst a global pandemic is hopefully a rare event, many companies regularly face major financial disruption and ownership succession problems, through the death or ill health of key people and business owners.

“There persists a significant protection gap amongst SMEs.”

Which is where shareholder protection insurance and key person cover comes in.

A shareholder protection policy provides a pay-out to allow shareholders, partners or directors to purchase the shares of another shareholder. Key person insurance, on the other hand, pays out in the event that a key individual passes away.

Shareholder protection policies are an important backstop.

If a shareholder becomes critically ill or dies, then they could sell their shares to an external third party even if this was against the wishes of the other shareholders. Alternatively, the spouse or family of the deceased might decide to keep the shares and become involved in the business. This could be just as unwelcome for the other shareholders.

A shareholder protection arrangement is designed to resolve such problems.

Policies can be set up as either an own-life plan under business trust or a company-owned plan to buy back the shares of the deceased.

With own-life under business trust, each company shareholder takes out shareholder protection insurance on their own life, which is then written into trust for the business. The policy will then pay out into the trust and used to purchase the shares of the previous shareholder. Company share purchase is where the business takes out a policy on the lives of each shareholder. The insurance pay-out then goes to the business instead of the trust so it can buy out the share then cancel it to increase the share percentage of each shareholder.

Onlinemoneyadvisor comments: “While losing a shareholder and navigating how their equity is distributed can be tough, losing an essential member of staff or a company director can also put a strain on a business, which is why key person insurance can be vital. Instead of the pay-out going to shareholders to purchase any equity, key person insurance pays out directly to the business to use it how they need.

“Key person cover is a type of life insurance which is purchased through a business to cover an employee or director who is responsible for contributing to your business’s net or gross profits. For example, a managing director, sales executive, marketing manager, or another person who brings a significant percentage of money into the business.”

Should you take out both key person insurance and shareholder protection?

Onlinemoneyadvisor states: “You can, though it entirely depends on your situation, the nature of your business, and budget. However, by taking out both of these policies, you’ll be ensuring that your company has a safety net for whatever happens.”

One warning – including critical Illness sees the premium rocket approximately five times over the cost of life cover.

Speak with a broker. They will be able to find you the most competitive quotes for both insurance types.