What is the best way to protect my business?

What is business protection insurance?

Business protection is the broad term used for life insurance products that can protect the financial future of a business. Aimed at small and medium-sized businesses, business protection insurance provides a lump sum payout to protect key areas of a business; specifically the ownership of the business, the profit and the debt.

Business protection insurance to protect ownership

If a partner or shareholder dies (or is diagnosed with a terminal illness) the policy will payout, meaning the remaining owners can use the funds to buy the deceased person’s share of the business. The remaining owners will keep control of the business and do not have to worry about it passing to the deceased person’s estate.

Business protection insurance to protect profits

If a key person in a business dies, the payout can help to provide a cash injection in the likely event of a drop in revenue. Not only can it provide a cash buffer, it can help to finance the replacement of a key individual.

Business protection insurance to cover debt

If a key person in a business dies, it is not just revenue that can suffer, a business could find itself unable to pay its debt. A payout could therefore provide a welcome cash injection to the business to ensure debts are kept up to date or even cleared.

On top of life insurance (which includes free terminal illness cover) a business can opt to add critical illness insurance. We will focus specifically on life insurance in order to keep this article concise, but to find out more about Critical Illness cover check out our article 'Best and Cheapest Critical illness cover in the UK'.

What types of business protection insurance are there?

It is important to fully understand the make-up of your business, who the owners are and identify any key employees before deciding what type of business protection insurance you need.

There are three types of business protection insurance and they are:

• Key person cover (often referred to as keyman cover)
• Shareholder protection
• Partnership protection

Another consideration is ‘relevant life’ cover (also known as relevant life insurance) and while this doesn’t technically come under the broader term of business protection, if your business has employees, then it may be something that is worth considering. Relevant life cover is a tax-efficient life insurance policy that the business takes out to provide a benefit to its employees. We cover relevant life cover in more detail in our article 'What is relevant life and should you have it?'

What is key person cover?

The death of a key person can seriously impact the finances of a business and even threaten its future and so key person cover (also known as keyman insurance or keyman cover) can be purchased to protect profits, cover debt or pay for the cost of replacing staff. A key person is anyone who you deem integral to the long-term financial success of your business. There is no set rule and it will be down to you to make that assessment.

Some examples of a key person could be a top performing salesperson, anyone with niche technical skills or perhaps the founder or figurehead of a business. It is important to note that while key person cover can be used to protect an owner of a business (to provide a cash injection to protect profits or debt), it should not be used to protect the actual ownership of the business (We will cover that later in this article). If you are considering a policy to cover both profit and debt, you will need to take out two policies, one to cover each element.

The policy can be set up on an ‘own life’ basis or ‘life of another’ basis and it will depend on how your business is set up. See our table below for further clarification.

Policy set-up for a sole trader

Type of Business	Policy to cover an employee		Policy to cover a business owner
	Own life or Life of another	Should it be placed into trust?	Own life or Life of another	Should it be placed into trust?
Sole Trader	Life of another	No a sole trader owns their own policy	Own Life	Yes it should be placed into trust for the family of the business owner

Policy set-up for a partnership

Type of Business	Policy to cover an employee		Policy to cover a business owner
	Own life or Life of another	Should it be placed into trust?	Own life or Life of another	Should it be placed into trust?
Partnership	Life of another	Yes it should be placed into trust for the other partner(s)	Own Life	Yes it should be placed into trust for the other partner(s)

Policy set-up for a Limited Company or Limited liability partnership

Type of Business	Policy to cover an employee		Policy to cover a business owner
	Own life or Life of another	Should it be placed into trust?	Own life or Life of another	Should it be placed into trust?
Limited Company or Limited Liability Partnership (LLP)	Life of another	No, the Limited Company or LLP is the policy owner	Life of another	No, the Limited Company or LLP is the policy owner

We cover key person cover in more detail in our article 'What is keyman insurance - How much is it and who should get it?'

What is shareholder protection?

The death of a shareholder in a business can have huge ramifications on not just the finances, but the equity that they leave behind. Without a proper plan in place, the equity would pass to the deceased shareholder’s estate, meaning family members (who may not have any vested interest in the future success of the business) could sell to a third party.

Shareholder protection insurance can provide a safety net and ensure that the remaining shareholders retain control of the business, while the deceased shareholder’s family receives a fair settlement.

When there are two business partners, the policy would usually be written on a ‘life of another’ basis (see our tables above) meaning that if either one of the partners was to die, the remaining partner will receive the payout in order to buy the remaining shares.

If there are more than two shareholders, each shareholder could have their own policy, written in the form of a business trust, so that if one shareholder dies, the payout is shared among everyone equally.

In order for the remaining shareholders to buy the shares, a cross-option agreement should be put in place (sometimes referred to as a double-option agreement). We go into more detail about this and cover questions such as who should pay the premiums (and why) in our article 'What is shareholder protection insurance? - complete guide on the benefit and costs'

What is partnership protection?

Firstly we should look at the definition of a partnership. The partnership act (1890) refers to it as ‘the relation which subsists between persons carrying on a business in common with a view of profit’.

The role of partnership protection insurance is to provide the funds to allow the remaining partner(s) to buy the deceased partner’s share of a business. Partnership protection offers security to each partner, ensuring that funds will be available to provide a payout to the beneficiaries of the deceased person’s estate.

Partnership protection should be set up on an ‘own life’ basis and written into trust to the other partner(s) of the business. As with shareholder protection, a cross-option agreement should be put into place which determines how the business is to continue in the event of a partner’s death.

How much does key person / shareholder protection / partnership protection cost?

Premiums for key person, shareholder protection and partnership protection can vary wildly and so it is important to understand exactly what you need and that you have all relevant information to hand.

Information you will need at quote stage includes:

1. the size of the sum you want to insure (based on the value of the business, the shareholding percentage of each shareholder and the value you have attributed to each key person)
2. the date of birth of each person you wish to insure (or at least the current age)
3. the age you wish to insure up until
4. key medical information (including any medication) At the very least you will need to know if they smoke and if they take part in any dangerous sports or pastimes

Business protection insurance is not something we would recommend purchasing without specialist advice and while online calculators may give you a rough idea of cost, they cannot ask the questions that are required to get a detailed and personalised quote. Below we have given some examples of the rough cost in a variety of scenarios.

 

Small Partnership

Business Type	How many people?	Key Business Info	Cover Required	Age, Health etc	Insurer	Premium
Accountancy Business (Small Partnership)	2 - Equal partners	Business is valued at £2 million	Partnership protection of £1 million	Partner A - Female, 55, Non-Smoker and in good health	AIG	£169.37 per month
			Partnership protection of £1 million	Partner B - Male, 27, Non-Smoker and in good health	AIG	£38.26 per month

 

Small to Medium Sized Business

Business Type	How many people?	Key Business Info	Cover Required	Age, Health etc	Insurer	Premium
IT Software (Small business)	3 - 2 equal shareholders responsible for day-to-day running of the business and 1 employee who develops the software	Business is valued at £3 million, employee earns £50k per year	Shareholder protection of £1.5 million for Shareholder A	Shareholder A - Female, 35, Non-Smoker and in good health	Aegon	£73.80 per month
			Shareholder protection of £1.5 million for Shareholder B	Shareholder B - Male, 33, Smoker and has high blood pressure that is not well controlled.	L&G	£216.13 per month including 50% rating for health
			Key Person cover £500k for Employee A	Employee - Female, 27, Non-Smoker and in good health	Zurich	£19.20 per month

 

Medium Sized Business

Business Type	How many people?	Key Business Info	Cover Required	Age, Health etc	Insurer	Premium
Car Sales (Medium sized business)	12 - 3 equal shareholders and 9 employees. 3 employees are key to the success of the business. Head of Marketing, The Financial Director and Head of Sales.	Business valued at £6 million. Head of Marketing earns £100k The Financial Director earns £90k and Head of Sales earns £75k.	Shareholder protection of £2 million for Shareholder A	Shareholder A - Female, 42, Non-Smoker and in good health.	Aegon	£143.80 per month
			Shareholder protection of £2 million for Shareholder B	Shareholder B - Male, 37, Smoker and has a BMI (Body Mass Index) of 36	Aegon	£235.50 per month including 50% rating for health
			Shareholder protection of £2 million for Shareholder C	Shareholder C - Male - 45, Non-Smoker and in good health.	Aegon	£169.80 per month
			Key Person cover of £1 million for the Head of Marketing	Head of Marketing - Female, 36, Smoker and in good health.	L&G	£119.18 per month
			Key Person cover of £450k for the Financial Director	Financial Director, Male, 40, Non-Smoker and in good health.	HSBC	£33.45 per month
			Key Person cover of £750k for the Head of Sales	Head of Sales, Female, 27, Non-Smoker and in good health	Aviva	£29.18 per month

Every business is different and so you should consider getting your business independently valued in order to ensure that you are buying the right level of cover. What is right for one business almost certainly won't be right for another and so don't be tempted to guess or simply replicate what others have done as you are likely to end up either over or under insured.

There is relatively little information available for small and medium sized businesses when it comes to business protection and it can be difficult to find clarity on what it is that you need and how much it will cost. That is why we have written this business protection guide and why we would always recommend that you seek advice from an independent adviser that specialises in business protection.

A specialist adviser will give you tailored business protection quotes and provide the additional administrative help you need when dealing with complex issues such as trusts and taxes. With multiple shareholders, it is often cheaper to have policies with different insurers, something a specialist adviser will arrange on your behalf. We at Money to the Masses have recently purchased our own business protection insurance and have been impressed by the level of service and expertise provided by a small team of independent specialists. The business protection specialists we used are completely independent and so have access to the whole of the market (including providers such as HSBC who only provide quotes through brokers) In addition, they receive preferential terms from insurance companies due to their size and so they guarantee to beat any quote. Another key factor for me was that the whole process was handled over the phone and without the need for face-to-face meetings. Just fill in the business protection quote form and they will be in touch to help. There is no cost to you and no obligation to proceed any further.

Summary

• Types of business protection insurance include key person cover, shareholder protection and partnership protection
• Relevant life insurance can be offered as a benefit to employees (but isn’t strictly a business protection policy)
• Business protection provides your business with financial security and enables you to protect the ownership of the business, the profits and the management of debt
• Key person cover can be used to provide a cash injection to the business to continue operation and in order to seek a replacement
• Shareholder and partnership protection provide security, ensuring the remaining shareholders retain control of the business while providing a fair financial settlement to the deceased person’s family
• Always seek advice from an independent specialist; you are likely to save money, you’ll receive support throughout the application process and you’ll benefit from buying the right policy for your business’ needs.
• It would also be prudent to discuss your business arrangements with a qualified solicitor who can ensure that your business is on a sound footing from a legal perspective. Areas such as - Trusts, Shareholder Agreement, Companies House records, Lasting Power of Attorney and individual Wills are all areas that may need to be discussed.