Business Cover
Published / Last Updated on 17/05/2021
Business Cover: Protection and Insurance Advice
Protection and Insurance cover for you and your business.
Whether the cover is for:
- Yourself
- Your business
- A key person or employee in your organisation
- Group of block employee cover
Contact us for more advice with business cover.
1. Directors Insurance
Executive Cover for Private Limited Companies
"Welcome to the website of Bloggs, Smith and Jones, Sons, Daughters, Parents, Grandparents, Spouses, Uncles, Aunts, Cousins and Second Cousins Limited." Would you really want your business to go this way? It may do if you have not made adequate succession arrangements for your business.
A private limited company is owned by shareholders and run by directors. These shareholders and directors could be the same people, especially in the case of family and small businesses.
On the death of a shareholder the other shareholders will ideally want to keep control of the deceased shareholders shares. This will avoid other people getting hold of the shares and being in control of part of the company.
By simply effecting Shareholder Protection which is basically a life assurance contract, the remaining shareholders can purchase the deceased person's shares. It is necessary for each shareholder to take out cover on their own lives, in trust for the remaining shareholders.
Shareholder Protection provides cash through a life assurance policy so that the remaining shareholders can buy the deceased shareholder's interest in the business.
This is beneficial for the company and the family - the company gets to retain the shares and the family is paid for them.
To make sure that it is possible for the remaining shareholders to purchase the deceased person's shares, a Share Protection Agreement will be required. This agreement can be set up in the event of a critical illness or death.
Succession Agreements:
It is important to have an agreement that will allow the surviving partner a legal right to buy out the deceased partner's share. There should also be an agreed basis for valuing that share as disputes are likely to arise. There are various types of agreement that are suitable such as:
Buy and sell
Cross option
Automatic accrual
Critical Illness Protection
If a shareholder suffered a critical illness (which resulted in the policy paying out), then he or she would have the option to sell his or her shares to the remaining shareholders. There is no binding option for the remaining shareholders to buy these shares as it may be against the ill person's will.
2. Buy and Sell Agreement
Using a life insurance policy with a special agreement for the business owners to buy the business interests from the family:
What happens?
- Each business owner sets up a Life insurance policy in trust for the other business owners
- A cross option agreement is also set up at the same time
- On death, the life insurance proceeds are paid to and used by the remaining business owners to buy the interest in the business from the deceased's estate.
The Agreement that allows the business interest to change hands:
Using a buy and sell agreement, the business owners all agree that on the death of a business owner, that the deceased's estate beneficiaries will sell the business interests and the remaining business owners(s) will buy that person's share in the business.
This is an absolute agreement, the beneficiaries of the estate cannot reject the surviving business owners buying the business interest.
By using this arrangement, there could be a potential Inheritance Tax problem for the deceased person's estate and family. This is because the estate is deemed to have received cash, rather than a share of a business.
This then means that Business Property Relief, where there is no inheritance tax payable on death for the transfer of business assets, would not be available if the assets were subsequently transferred from the estate to the other business owners.
3. Cross Option Agreement
Using a life insurance policy with a special agreement for the business owners to buy the business interests from the family:
What happens?
- Each business owner sets up a Life insurance policy in trust for the other business owners
- A cross option agreement is also set up at the same time
- On death, the life insurance proceeds are paid to and used by the remaining business owners to buy the interest in the business from the deceased's estate
The Agreement that allows the business interest to change hands:
This type of business owner agreement allows the remaining business owners to buy the deceased's share of the business from the estate as an option and business property relief for inheritance tax is still retained.
This is an option agreement, the beneficiaries of the estate can reject the surviving business owners buying the business interest if they do not buy within a specified timescale.
This arrangement is known as a Cross Option Agreement and involves the remaining business owners having a right to buy the deceased business owner's share from his or her estate.
There is a specified time during which the remaining partners can buy the share, and during this time the estate has a duty not to sell it to anyone else.
4. Automatic Accrual Agreement
A life insurance policy is established for family or the estate, equivalent to the value of the interest in the business. This is used to compensate the beneficiaries for loss of the business interests on death. There is an agreement that the business interests are bequeathed to the surviving business owners only.
What happens?
- Each business owner sets up a Life insurance policy, possibly in trust, for their family or beneficiaries
- An automatic accrual agreement is also set up at the same time for the business assets to transfer to surviving business owners
- On death, the life insurance proceeds are paid to the beneficiaries and the business assets transfer to the surviving business owners
This agreement that allows the business interest to change hands is known as the Automatic Accrual method.
In the event of death, the business owner's share automatically goes to the surviving business owners without going to the estate. For Inheritance Tax purposes the estate is treated as receiving the cash, unless the policies are in trust, and not the share of the business. This may mean that Inheritance Tax may be payable.
This is an absolute agreement, the beneficiaries of the estate cannot prevent the surviving business owners receiving the interest in the business or reject the life insurance proceeds.
5. Key Person Cover
The death of executives that produce or influence a large portion of the company income could have disastrous effects on the future of the company.
By effecting Key Person Protection the company can be financially compensated. This may assist in employing the necessary expertise that were lost on the executive's death.
Are you a member? Why not value a Key Employee (it could be yourself) using our Key Person Calculator.
This is usually a life cover policy for a set term of years which pays out a cash sum if the key person dies. It is possible to set up cover on a whole of life basis but this is more expensive. However, if the person covered retired, the policy could be surrendered by the company and they could use the value of the policy as they wished. If a policy is taken out over a specific term, there will be no surrender value at the end of the policy. The amount of cover for the key person is generally how much the business would lose as a result of death. The money could be used to recruit or to employ the necessary temporary expertise.
There are also policies that may pay out in the event of the key person suffering a critical illness. In this respect, the policy would either pay out on death or in the event of a critical illness. It is generally cheaper to have the critical illness option as an extra benefit, rather than taking out a separate policy.
Premiums for this cover are usually paid by the business and, if they are for a short term (possibly up to five years) can also be claimed as a business expense. If tax relief has been received on the premiums, it is likely that the pay out would be taxed as a trading profit. However, if no tax relief is received on the premium, it is unlikely that the pay out would be taxed. We recommend that you obtain written confirmation from the tax man in each particular case.
It is also possible to arrange Key Person Sickness Cover to provide the company with a continuing income, should an executive suffer sickness or injury. Covering these eventualities is relatively inexpensive - you may even be able to offset the cost of Key Person Cover as a business expense.
This subject is a complex one and we suggest you take professional advice.
6. Partnership Agreement
"Welcome to the website of Bloggs, Smith and Jones, Sons, Daughters, Parents, Grandparents, Spouses, Uncles, Aunts, Cousins and Second Cousins."
Would you really want your business to go this way after the death of your business partner? It may do if you have not made adequate succession arrangements for your business.
A partnership is made up of two or more people who work together in business. Because each partner owns a share of the partnership, they are entitled to a share of any profits. It is also usual that these partners will be self employed. If there is no formal agreement, on the death of a partner, the partnership will automatically be dissolved.
Because partners do not have employers to provide certain benefits like life assurance and sickness cover, they need to make their own provision.
If one partner died, the other partner may want to take over the deceased partner's share so that he can continue to run the business without having outsiders making changes. Cover in the event of a partner's death can be simply arranged by using Partnership Protection. This is basically a life assurance policy that will pay out to the remaining partner. This will enable him to purchase the deceased partner's share from the estate. The policy is taken out for the value of the share and is put in trust for the other partner(s).
This is beneficial for the partnership and the family - the partnership retains the deceased partner's share and the family is paid for them.
Succession Agreements:
It is important to have an agreement that will allow the surviving partner a legal right to buy out the deceased partner's share. There should also be an agreed basis for valuing that share as disputes are likely to arise. There are various types of agreement that are suitable such as:
- Buy and sell
- Cross option
- Automatic accrual
It is also possible to arrange Key Person Protection and Key Person Sickness Cover to provide the partnership with a continuing income, should a partner suffer sickness or injury.
7. Insurance for Self Employed: Protection and Insurance Advice
A sole trader is a self-employed person who owns and runs a business. The sole trader may also have employees.
Protection is crucial
Because a sole trader does not have an employer to provide benefits such as life assurance and sickness cover, the individual will need to make separate arrangements. This is particularly important if the sole trader has a family or employees - what would happen if the sole trader died?
Where a sole trader has dependants, life cover is important so that they are provided for in the event of his or her death.
Redundancy liability if you die?
If the business does not carry on when the sole trader has died, there may be redundancy payments that need to be made to employees - this can be added on to the life cover requirements.
What if you are ill?
Another factor to bear in mind is sickness or injury of a sole trader - if he or she cannot work, who will pay the bills? This is why sickness cover is so important as it can provide an income during the sole trader's recuperation.
Cover in the event of death and sickness can be arranged at a relatively small cost.
8. Insurance for Employees
Employees leave:
The days of staying in the same job for life are possibly now a thing of the past.
This can cause problems for employers, especially where hard working, skilled staff move on to pastures new.
Recruiting is a 'pain':
The costs and time involved in recruiting and training new staff soon mount up and then they move on.
Employee benefits help:
By putting certain benefit packages in place for your employees you can help reduce the chances of skilled and valued staff leaving: not only because they feel more looked after but because other employers may not offer the same benefits.
Employee Life Insurance: Protection and Insurance Advice
Company Life Cover Or Group Death In Service Benefits (as it is sometimes known)
Group life assurance polices (or death in service policies) can provide a lump sum of money if an employee dies.
The amount is usually calculated on a multiple of salary - maybe three or four times the salary roll.
This type of benefit is likely to appeal to staff who have partners and children.
Employee Sickness Insurance
Income Protection or Group PHI or Group Risk Policies
These can be set up to cover an employee against long term sickness and disabilities by providing a monthly income.
These policies can be beneficial where your company only pays a person's salary for a limited time when they are off sick.
If the employee has no other provision, they could be receiving State benefits only during sickness.
- How much more does your average employee earn?
- Would it put added stress on them?
Employee Medical Insurance: Protection and Insurance Advice
Group Private Medical Insurance
This type of policy allows people to receive private medical care for a number of conditions, rather than relying on the NHS.
Private Medical Insurance policies can also include partners and children, so it is likely to appeal to your employees in this position.
This cover can also be beneficial for key employees to try and minimise the time off work, waiting for treatment or an operation.
Request expert advice about setting up a Group Private Medical Insurance policy.
Employee Pension Scheme: Protection and Insurance Advice
Company Pension Schemes
There are many different types of pension scheme that can be set up by an employer and the right one for you will depend on the issues you deem most important.
No matter what type of pension you set up for your employees, it will be a valuable benefit for them.