Business Protection

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Protecting the Ownership of your Business – Shareholder Insurance

Shareholder Protection Insurance

The loss of an owner or a partner can cause numerous problems, but many people overlook
the destabilizing effect such a loss can have on the business itself.

When an owner or partner dies, then their stake in the business is likely to pass directly
to their family.
If this was a majority shareholder, this could mean that the remaining owners lose control of
some orall of the business and have to work with the spouse or child of a former owner.

When do you need Share Protection?

It is always possible that whoever inherits a part of the business may choose to be a silent partner, but there is no guarantee of this. Some will want a more active role and may have very different ideas on what the firm should be doing. Another possibility is that the beneficiary may want to sell their stake. 
But if the remaining owners can’t find the funds to buy this shareholding, it could be sold to a competitor.

Of course, the ideal solution is for the remaining owners to buy back the shares, giving
the family a cash sum while ensuring they retain control of the business. The question is, will they be able to raise the funds to do this?
This is where Share Protection insurance can help.

Shareholder Protection: how it works

Shareholder Protection insurance provides a pay-out to buy back shares, helping owners
stabilize the business and ensure it is kept in their hands and not someone else’s.

There are two parts to this insurance:
› A life insurance policy: This will pay out on the death of one of the owners
› A legal agreement: This sets out when and how these shares will be bought back and at
what price

There are a number of ways in which the insurances can be set up – by the Company, for a
Company Share Buyback arrangement, or by the individual shareholders, each on
their own life.

Advice will be given depending on the individual Company’s set-up and circumstances.

Key Person Cover

Many businesses don’t consider the financial implications of losing a key member of staff. Negative effects can include:

  • Loss of profits or sales
  • The cost of finding and training a replacement
  • Potential loss of customers and suppliers, if the key staff member was their main contact.

Key Person Protection is basically life insurance, with or without a critical illness cover option, which a business takes out on certain important members of staff. It can provide some financial stability in the event of a key member of staff being taken
critically ill or dying.

The business pays the premiums, and if the insured person dies or becomes critically ill during the policy term, the policy will pay out the agreed sum to the business.

This financial pay-out can help ensure the business remains viable, continues to trade, and has the opportunity to find a suitable replacement.

If a business loses a key member of staff to critical illness or death* – 

40% of businesses cease trading within one year

46% of new businesses cease to trade immediately

63% of sole traders cease to trade immediately

*Source – Legal & General

Who is a key person?

The simplest definition of a key person is whether their death or critical illness would cause significant financial loss for your business.

The indisposition of an owner, managing director or specialist are what is most likely to have serious consequences, particularly in smaller outfits where other staff may not have the right skills or experience to fill these roles. Almost anyone could be a key person, but the positions that are typically seen as key to a business are:

  • Managing Director
  • Sales Director
  • Technical Director
  • Marketing Manager
  • IT Manager

Relevant Life Insurance – Tax Free Family Life Cover

Family life cover paid by the Limited Company
Premiums are Corporation Tax Deductible
No NI cost / No P11D benefit in kind.
No Inheritance Tax Liability

Benefits don’t count toward pensions annual or lifetime allowances
Cover placed in Trust to chosen Beneficiaries
HMRC approved and recognised
Maximum age at expiry of cover 75 years

Age of the person covered / Maximum sum assured*
based on salary multiples –

17-29yrs 35 x income

30-39yrs 30 x income

40-49yrs 25 x income

50-59yrs 20 x income

60 +yrs 15 x income

*varies by provider

COMPARING THE COST OF A PERSONAL LIFE POLICY TO A RELEVANT LIFE PLAN -* 

PERSONAL LIFE POLICY RELEVANT LIFE POLICY
PREMIUM £100 PER MONTH £100 PER MONTH
EMPLOYEE NI NATIONAL INSURANCE
(2%)
£3.45 £0.00
EMPLOYEE TAX INCOME TAX
(ASSUMING 40%)
£68.96 £0.00
EMPLOYER NI NATIONAL INSURANCE
(ASSUMING 13.8%)
£23.79 £0.00
EMPLOYER TAX LESS CORPORATION TAX
(19%)
MINUS £37.28 MINUS £19
TOTAL COST £158.92 £81.00

A SAVING OF £77.92 – ALMOST 50%.

RELEVANT LIFE IS CORPORATION TAX DEDUCTIBLE. AND NO P11D BENEFIT IN KIND CHARGE TO THE EMPLOYEE.

*Source Legal & General 2017 using 2020 Corporation Tax Rate 01904 208470 support@what-life.co.uk www.what-life/business-protection