What Does A Business Protection Adviser Do?

What business protection products come under succession planning?

There’s a single type of policy for succession planning, and it’s called shareholder or partnership protection.

Perhaps you’ve got a limited company or an LLP. At first, it’s probably not worth very much. You start the business and want to make it a success in the first year or two. After a while, you make a profit, grow a bit further and there’s more value.

If you’re a single shareholder or a couple, this may not be so crucial. But if there are several shareholders who aren’t related to each other, and one of them dies or becomes so unwell they will never work again, that person’s shares may go to their next of kin.

Shareholder protection gives a cash injection to the remaining shareholders that’s equivalent to the value of that person’s shares. The remaining shareholders can then go and buy the shares back from their next of kin.

It gives their family fair value for those shares, and allows the shareholders to retain ownership of the company. You do need to have certain legal agreements in place, such as a shareholder agreement – which is not the same as the Articles of Association that an accountant sets up for you when you incorporate.

You also need a cross option agreement, which gives remaining shareholders the legal framework to enforce the trade, and gives the next of kin a framework within which the company must buy the shares. Depending on the structure of the shareholder protection, you may also need Trusts.

Shareholder protection is less important for a young company with a lower value, but once the value reaches hundreds of thousands or above, the amount you’ve got in the bank probably doesn’t match the value of the business.

This sort of protection can ensure that after a horrible event, there is a clear ownership structure and everyone’s got what they want.

What business protection products sit within continuity planning?

This makes sure the business can continue if it loses a key person, needs to repay debts or cover personal guarantees. There are three relevant products here.

Key person cover is the first. It’s a wrapper that includes life insurance, critical illness cover and income protection. If a key member of staff dies, goes off long-term sick or is diagnosed with something serious, there is a cash injection into the business to help it survive.

If your business is highly reliant on one key individual to bring in all the contracts, for example, what happens if that person’s lost through death or disease?

Debt protection is the second product. To grow, businesses often take out a commercial mortgage, invoice factoring, asset finance etc. Again, if a key director or shareholder dies or becomes sick, the business might need to repay that debt to relieve the pressure at a challenging time. We can cover that.

Personal Guarantee Insurance is the third. If anyone’s signed a personal guarantee on those debts, if the business goes into liquidation they could have their house repossessed. Personal guarantee insurance can prevent that happening, by repaying that debt if the business can’t.

What business protection options are there as employee benefits?

Within this category we offer group private medical cover for businesses, death in service products, critical illness cover and income protection.

You can cover all your staff. If you cover a group of people, there’s a free cover limit. It can help people who can’t take individual insurance because of a poor medical history, or a past cancer diagnosis or heart attack.

On a group basis they can get cover, because the barrier to entry is much lower. There are a few overarching questions for the company to answer – such as whether anyone has died or had cancer within the business in the last few years. If the answer is no, no further underwriting is done on the individuals.

If you’re a small company with perhaps less than 10 employees, and you can’t afford to offer employee benefits or no-one is crucial to the running of the company, potentially, you could get cover on an individual basis.

Two key products here are relevant life plans and executive income protection. Relevant life plans are tax wrappers around life insurance – like an ISA is a tax wrapper for savings. It lets you put your own insurance through the business, and typically offsets it against corporation tax.

Executive income protection is the same. The plan goes through the business and often qualifies for corporation tax relief. Then, if you go off long-term sick, the plan pays your income instead of you taking salary and dividends out of the business long-term, which might damage the viability of the company.

Are there other ways business protection can help?

Yes. A lot of business owners can be particularly wealthy. As they come to the end of their working life and want to sell the business, they might realise a few million pounds. They might have invested in property when it was a lot cheaper and gained wealth that way.

People in these situations are likely to face an inheritance tax problem. Whilst we don’t give inheritance tax advice, and we don’t set up family companies or Trusts, we do support clients who’ve been advised to take protection to mitigate inheritance tax.

We can set up policies to protect against inheritance tax when you make gifts to family members, for example. As the inheritance tax drops over the seven years after you make a gift, the policy payout reduces in line with the liability.

Some clients have an inheritance tax issue that they can’t mitigate, perhaps because their main residence is worth a lot of money, or their money is tied up in assets within their estate.

In these cases whole-of-life insurance can help.

Most people don’t have this – they normally take out ‘term’ insurance, which is designed to pay a lump sum if you die within that term. You might be covered until age 70. If you die after that age, there’s no payout.

Whole-of-life cover changes that from ‘if’ to ‘when’. If you’re concerned that your children will be hit by a large inheritance tax bill, you can fund a policy that pays out into Trust. It sits outside of the estate, so your children can access it to pay inheritance tax and release the assets.

When should I look at getting business protection insurance?

Different products can become useful at different stages. For example, if you’ve just set up a business, you might want to put cover in place for yourself through the business. It might be a benefit in kind or an allowable expense. You can do that pretty much straight away.

For some policies, we need to make sure that you qualify, but that can be relatively quick. You probably don’t want shareholder protection until a few years have gone by. In the early years you may not have much value in the business unless you’ve made a lot of investments.

As you go through the business cycle, some policies will be more useful than others. When you start out, key person cover is important because you’re relying on one or two key people.

But if you grow your business up to 1,000 people, the founder is probably no longer key – in that the business isn’t going to implode without them. At that point, shareholder protection would be more important. The value of the business with 1,000 employees will be huge compared to when there were just five.

People sometimes say that they plan to sell their business soon, so they don’t need cover.

But arguably, that’s when you really need to look at it. If you’re planning to sell in the next few years, what happens if someone dies and there’s a dispute about the shares? People don’t want to buy into an argument, so that could derail things.

Perhaps two key people will stay in the business for two years after the sale, to make sure there’s a smooth transition. But if one gets cancer or dies, the other may not gain full sale value, because the targets are missed.

Basically, business protection can add value from day one – or even before you’ve set the business up – all the way through to post-sale, when an inheritance tax conversation might be useful.

There’s no right or wrong time to speak about this. And remember that the older you are, the more expensive these plans get, because there’s a higher risk of death and disease. The cheapest time to take cover out was years ago – and the next cheapest time is right now. So start the conversation.

It’s one of those things that’s very important, but doesn’t seem urgent to most people. But we do get calls from people who were too busy in the past to talk about protection. Then something happens. It doesn’t fill me with any joy when I have to tell them that because of that event, they might not be able to get insurance for years, if ever.

It’s like having a car accident and then trying to get car insurance afterwards. Insurance is there for an event before it happens, to support you when it does.

Also, if a business reaches the stage where it’s looking for investment, there may be a requirement to put key person cover in place. We do this a lot when companies go through a series A or a series B, or an angel round. The investors then require a certain amount of key person cover.

We’ve done one this week worth £4 million, for a company that received funding with that as a requirement. They have to get cover within 90 days of the investment hitting the bank account. If they don’t manage it, they’d be in direct contravention of the investment agreement.

Does it cost for an initial consultation with you?

We don’t charge anything because we’re remunerated via commission from the providers. There isn’t an initial consultation fee. That’s how our industry works. Putting something like that in place would just be another barrier.

Insurance is often a ‘tomorrow’ job. It’s not like buying a house where you need the mortgage there and then to secure the property. People are more relaxed about the insurance side, until something happens. We need to remove the barriers to help people get the cover they need in place before things go wrong.

You’ve demonstrated how a business protection advisor can help. Any final thoughts?

We’ve covered a lot of what business protection is and why it’s useful. My advice to anyone listening to this episode is to really consider what you do day-to-day and how important that is to your company.

As a business owner I try to look forward as much as possible, because I’m trying to build the company and put the right processes in place, with people and systems behind me to address any potential problems.

But structures and systems can’t help if I die or become ill, and the business could fail. So these are the crucial questions to ask yourself as a business owner. You can then mitigate those risks with insurance.

Will an insurance policy make you feel better about these things? Maybe not, but if there’s a financial safety net, you’ve effectively bought yourself more options.

When we help clients with claims, they never say that they wish they’d paid less and had less cover. Protection can sound expensive at the beginning, but in reality, the most expensive option is having nothing in place when you need it.

Key Takeaways:

• A business protection advisor offers impartial advice and finds the right insurance cover to protect a business and its people.
• Business protection is a crucial financial safety net that safeguards the income-generating core of a business and can be used to provide tax-efficient benefits and support for employees.
• The four core categories of business protection are succession planning, continuity, tax-efficient products, and employee benefits.
• Key protection products address critical events, such as shareholder protection for maintaining ownership structure and key person cover for business continuity after the loss of essential staff.
• Protection is beneficial at every stage of a business, and delaying the conversation increases costs while risking the inability to obtain necessary coverage after an adverse event occurs.

Business protection policies are subject to underwriting, policy definitions, exclusions, and insurer terms and conditions.

Tax treatment depends on individual circumstances and may change in future.

Business Protected does not provide legal or tax advice. For specialist tax advice, please refer to an accountant or tax specialist.