Personal Finance

Four key insurances for protecting your business financially

What steps can you take to protect your business financially?
What steps can you take to protect your business financially? What steps can you take to protect your business financially?

LAST week I covered the reasons for making a business will, and I will follow this week with how you can protect your business financially.

There are four key insurances to consider:

Protecting debts, or a loan; protecting a key member of your personnel that would affect profitability or the viability of a business; protecting the future ownership of a business and passing to your family; protecting your family.

Protecting the loan is a simple one. A bank assessing the viability of a business after the death of a key employee or owner, will want to know if their money is secure.

If they believe the business is potentially at risk, they could easily call in the loan, jeopardising cash flow, and naturally ending the business.

You simply insure the business owner for the amount and term of the loan, so that is repaid and the business isn’t beholding to a bank and can then drop that key expense.

Protecting a key employee is just as crucial. How would you cope if that key employee was off work with accident or sickness or had died?

As above, the bank would clearly be worried about their assets and would move to protect them, potentially calling in loans.

However, from a business perspective, what would be the cost to that business to find the new employee to replace such a key worker, let alone, loss of sales and loss of business contacts of that employee.

Whilst you insure your stock, your cars, vans and buildings, this biggest driver of profit is often overlooked. The company simply insures the key employee (Keyman insurance) and on their passing, the benefits go to the company.

How much cover? Typically, you may look at replacing the profits they are responsible for i.e. five times the net profit attributable to them. Others simply do a multiple of gross profit although a smaller multiple of two times is normal. You insure the key employee for as long as you expect them to be there (normal retirement date or contract date).

You can offset the cost of the premiums against corporation tax as an allowable business expense, but in the event of a claim, the sum assured (the insurance money) would likely become a trading receipt, and be added to your company’s income and therefore become taxable.

To claim tax relief on the premiums, the policy must be classed as short term i.e. it is not a long-term whole of life policy for example, and it should match the expected time the employee is likely to be there and cover a loss of profits.

Such a plan can be set up for critical illness or for death.

Protecting the future ownership of the business is vital having built such a financial asset.

A shareholder protection plan insures Directors for the value of their shares.

This is completed with a cross option, or double option agreement.

The cross-option agreement enables the deceased’s family to compel the surviving directors to buy out the deceased’s shares and grants the surviving owner/managers the option to buy the shares.

If either party triggers the option, the other has to comply.

The insurance policy is written in trust (it goes directly to them) for the other shareholders so that capital is fully available to buy out the shares completely from the other party.

Be careful of old ‘binding’ agreements like this.

A ‘binding’ agreement like a buy/sell arrangement will mean you would lose business property relief for Inheritance tax on the value the shares.

Finally, protecting the family through the company. Many business owners have life insurance, which they pay, through their personal bank after their earnings are taxed and clobbered with national insurance.

A relevant life policy allows the company to pay the premiums, which are tax deductible, but the benefits are paid to the family in trust (free of IHT). This is a significant tax and national insurance gain to the director, one few take the benefit of.

All of the above should be quoted through your independent financial adviser who will search the market for the most competitive premiums.

Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a financial question, call Darren McKeever on 028 6863 2692, email info@wwfp.net or visit www.wwfp.net.