Pros and cons of business protection

Ms Davies says the question to ask is how could a business manage if they didn’t have any cover in place?

She says: “Having a complete business protection solution should ensure that on the death of a business owner or key individual the business can keep running profitably and control is not lost.”

According to Ms Davies, business protection policies are usually a form of term assurance plan and so the cost would usually be the same as providing normal family protection.

However, she says there can be other associated costs such as legal and tax advice, but this would be dependent upon the type of protection that is taken out and the client’s individual needs.

According to Alan Lakey, partner of Hemel Hempstead-based IFA Highclere Financial Services, it is important to note that directors or partners protection and key person insurance are often five-year renewable term assurance policies. Mr Lakey says this reduces the immediate cost and the renew option ensures continuity.

Relevant life plans have become popular since their inception in 2006, he adds. These are term life plans which an employer arranges on the life of an employee whereby the benefits are paid under trust to the deceased’s family or estate.

As directors are employees, Mr Lakey says this offers an avenue for them to obtain lower cost cover than if paid for as individuals.

He says: “The employer obtains tax relief on the premiums and the premium is not taxed as a benefit in kind.”

For extended periods of sickness, Mr Lakey says advisers should contemplate a group income protection plan that will ensure an ongoing income to the business to assist with sickness payments.

According to Ian Smart, head of product development and technical support for Bright Grey, the clear benefits of business protection are:

1) Provides a financial safety net in the event of the death or critical illness of a key person.

2) Provides funds to the remaining partners or shareholders so that they can buy out the critically ill partner or shareholder or purchase the deceased’s shares from his or her estate.

3) Provides funds to ensure repayment of a business loan in the event of death or critical illness.

4) Ensures business continuity by providing funds available to the remaining shareholders or partners to enable them to purchase the individual’s share of the business.

5) Ensures that the deceased’s family or the critically ill shareholder or partner receives a fair value for their share of the business.

According to Mr Smart, the downsides of business protection are:

1) For own life plans written in trust, it is recommended that the premiums on each of the plans are equalised to ensure commerciality.

2) A charge to income tax under the Pre-Owned Asset Tax legislation may arise where an own life plan is written under trust.

This is because the settlor of the trust is usually also included as a discretionary beneficiary of the trust. Accordingly, Mr Smart says where the plan pays out on critical illness or terminal illness and the funds continue to be held in trust, a charge to income tax could arise under POAT.

3) The Companies Act 2006 sets out strict rules which must be complied with in relation to a company buying back its own shares.

4) Company buy-back arrangements are generally not suitable for new companies since the shares must have been held by the seller for at least five years. Otherwise, Mr Smart says the buy-back may not be treated as a disposal for capital gains tax rather a distribution, which could result in a higher tax liability on the sale of the shares.

5) Life-of-another plans may not be suitable where there are more than two or three partners or shareholders in the business as this could result in multiple plans being written.

For example, Mr Smart says a four shareholder company could require 12 plans – shareholder A takes out plans on each of the lives of B, C, and D.

Dougy Grant, protection director of Aegon, says the size of business share could be an issue if it is particularly large but an adviser should also consider the procedures laid down in the articles of association or the partnership agreement if there is one because these can vary.