It’s always an interesting time when your professional and personal worlds collide. As a small business owner, I’m currently going through the process of reviewing our business protection cover as we convert to an LLP.
Even when you are just as familiar with the products as the adviser guiding you, you realise that setting up business protection is far from simple.
How do you put a realistic figure on people’s professional worth? How do you realistically value the company for insurance purposes? How do you prioritise the protection of most value to the company and the individuals involved?
Losing a key person to illness or death isn’t something that we like to think about, but it can have disastrous consequences for a business. Figures from Legal & General showed that 40 per cent of SMEs would cease trading within a year of losing a key employee or owner, yet 60 per cent do not have any cover in place to protect against this risk.
It forces a business to truly analyse the outcome of a ‘crisis’, and whether it could survive. Crucially, for those who work outside of the industry, you also need them to buy into the importance of the cover in the first place.
Key person insurance
Key person insurance provides a business with a cash injection should it lose someone who contributes to the company’s continued financial success.
This can be taken out in various forms, including life cover (pays the company a lump sum on the death of a key person), critical illness cover (pays the company a lump sum if a key person suffers a covered serious illness) or income protection (pays the company a monthly income if a key person is unable to continue working due to accident or ill health).
Cover is linked to the typical amount of profit they generate, or costs associated with recruitment and training of a new individual. The amount a key person is insured for must be proportionate to the perceived loss to the business of their departure.
This allows a company to retain control of business shares if a partner passes away or suffers a serious illness. This can be vital as without it, shares are likely to pass to the deceased’s estate.
For example, if two friends run a small business and one falls seriously ill, and their spouse or relative turns up for work on Monday instead of them, is that what either party would want to happen? A business could easily find itself with a shareholder that is unable to make a valid contribution, or has a detrimental presence.
By taking out share protection the business can ensure that it has the right (and the finances) to purchase shares should anything happen to a partner in the business.
Relevant Life Cover