Business owners take on many roles but, often, their most important job is reacting to events that could affect the company. It’s up to them to steer the ship and overcome hurdles so the business can grow and thrive.
Unfortunately, there are some challenges that are outside of anybody’s control. For example, how would your business owner clients deal with a serious illness that means they can’t work for an extended period of time? What would happen if a key person in the company suddenly died?
Some of your clients may be familiar with personal life insurance or income protection policies, but they often don’t have the same protection in place for their business.
This could leave them vulnerable if the worst happens to them or any of their employees.
Fortunately, a financial planner can help your business owner clients assess their protection needs and put measures in place to deal with some of these challenges.
Read on to learn why business owners should work with a financial planner to prepare for the unexpected.
The loss of a key person could seriously disrupt a business
A business runs on the strength of its people. If a crucial member of staff falls ill or dies suddenly, the company could lose a significant amount of revenue.
There may be a big drop in productivity and, in some cases, your client might need to cover the costs of hiring and training a replacement.
Key person cover is designed for this eventuality. It’s an insurance policy taken out on a crucial person in the business. It may cover your clients in the event of an unexpected death as well as a serious illness.
A “key person” is defined as anybody whose death or disability would have a serious effect on the profits and future direction of the company. While it could be used to protect shareholders, this type of protection can be used to cover any member of staff.
Key person cover might help in several ways including:
- Maintaining revenue and protecting profits
- Hiring and training a replacement
- Paying corporate debts
- Facilitating the buyout of a shareholder or their family after a serious illness or death.
Ultimately, key person cover ensures that the business can continue operating if the worst happens to an important member of staff.
The remaining shareholders might struggle to maintain control of the business if your client dies
Shareholder protection pays out a lump sum in the event of your client’s death, so the remaining shareholders have the funds to purchase their stake in the company.
This could benefit the business as it allows shareholders to retain control of the company in the event of an unexpected death. It also means that they don’t have to borrow the money to purchase the shares, so they avoid taking on unnecessary debt.
Additionally, it could help the family of the deceased. The family will typically inherit the shares that your client leaves behind, but they may not want to take on a controlling share of the business.
Having shareholder protection in place means that your client’s family will receive a large cash injection from selling the shares.
Your client’s family could be burdened with significant business debts
Businesses typically borrow the capital they need to expand and it’s normal for companies to operate with some level of debt at times.
Yet, this could cause problems if your client dies and leaves behind a business with large debts.
If the loans are solely in the deceased person’s name, they may be written off. However, if the business is jointly owned then the remaining owners will normally be liable for the debts. In the case of a limited liability company, the business itself takes responsibility for repaying the money.
Depending on how the company is structured, a large portion of your client’s estate could go towards clearing business debts. Alternatively, their family might inherit control of the business and assume the responsibility of paying back any loans.
This may leave them in an incredibly difficult financial position, which is where loan protection could help.
Loan protection pays a lump sum to clear any business debts in the event of your client’s death. As a result, their family don’t have to deal with a large debt burden, and they won’t lose a portion of your client’s estate to repay the loans.
Relevant life cover protects employees and could save your client money
Relevant life cover provides protection for the employees of a business. If an employee dies unexpectedly, their family receives a payout in much the same way as they would with a personal life insurance policy.
Your clients can cover any employee, including themselves, that is a UK resident and works for the company in a PAYE capacity. Since they can pay for life cover using business funds rather than their own personal wealth, this could save them money.
Relevant life cover could also be an attractive perk for employees, helping your client hire and retain the best people for their business.
It may be tax-efficient too, as the premiums are considered an allowable business expense. Consequently, your client could pay less Corporation Tax if they have relevant life cover.
We can help your business owner clients understand their protection needs and explore the different solutions available to them.
Get in touch
If your business owner clients feel that they are unprepared for the unexpected, we can help.
They can contact us at hello@ardentuk.com or call 01904 655 330. As an award-winning financial advice company that was a 2022 VouchedFor Top Rated firm, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
Note that life insurance plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.
Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.
