Insuring buildings, equipment and vehicles is commonplace but what if a key person or business owner either passes away or falls critically ill?
Businesses spend a lot of money on insurances but an area frequently neglected is insuring people.
They are often a business’s most important asset but the risks associated with the death or serious ill health of a vital individual are often uninsured.
There are some 5.2 million businesses in the UK employing 25.2 million people. An amazing 99.9 per cent of businesses are SMEs.
Fifty-seven per cent have some form of debt. Yet 28 per cent were not aware that a director’s loan account needs to be repaid even when they have gone.
And over 50 per cent of business owners have left no instructions in a will or any special arrangements regarding shares.
According to research by Legal & General, 53 per cent of businesses would cease trading in under a year if a key person died or became critically ill.
L&G noted: “We’ve found that there continues to be a clear lack of awareness of business protection.
“When running a business, most owners are focused on day to day delivery and doing the best for their customers. Unfortunately, this means they don’t always have the time to think about the ‘what ifs’.
“They have not considered the impact on their business, its ability to continue to trade and their own livelihoods.”
So what to do about it then?
Key person cover is an insurance offer that provides the business with a sum of money if a key person dies or is seriously ill. It protects against loss of profits, recruiting and training a replacement, the loss of important business contacts if the key person is not there to maintain relationships, and the danger of customers and suppliers losing confidence in the business.
A key person is an individual whose skill, knowledge, experience or leadership contributes to the financial success of a business directly or indirectly – chairman, managing director, marketing manager, IT specialist, finance director, sales manager, for example.
Shareholder protection is equally important.
The loss of a business owner may destabilise a business and can quickly lead to financial difficulties.
If a shareholding director dies, his/her shares are normally inherited by the spouse or family under the terms of the will.
This means that the surviving business owners could lose control of a proportion or, in some circumstances, all of the business. The family may choose to become involved in its ongoing running, or could even sell their share to a competitor.
Share protection allows the remaining partners, directors or members to remain in control.
Share protection is taken out by shareholders, covering the lives of the other shareholders. In the event of death, money is paid into a trust with surviving shareholders as beneficiaries.
A ‘cross-option’ agreement is put in place whereby if the surviving shareholders ask the beneficiaries to sell the shares to them they must do so and if the beneficiaries ask the surviving shareholders to buy the shares they must do so.
The end result is that surviving shareholders retain control of the business while the family of the deceased gets some cash.
Business loan cover ensures that business borrowing – overdraft, loan or commercial mortgage – is paid off if a key person or loan guarantor dies.
When a valid business loan protection claim is made, a sum equal to the outstanding debt could be paid to either the business or directly to the lender.
So, what price peace of mind or are you feeling lucky?
Better to be safe than sorry.