Why you need business protection insurance

As a business owner, your main focus will be servicing your existing clients well and finding new ones to help your business grow.

But are you prepared for those ‘what if’ scenarios? We don’t want to think about the worst happening, but we must ensure our businesses and families – often intertwined – are protected.

For example, suppose you ran a business with your sibling and you passed away. What are the financial implications for the company and your family?

If your best sales manager is unable to work due to critical illness, how do you compensate for the potential loss in sales?

Soberingly, some 52% of businesses would cease trading in under a year if a key person died or became critically ill.¹

There are various types of business protection you can take out to safeguard your business and family. These include:

1.    Key person cover

This is insurance taken out by a business on the life of any person who directly impacts profits. It could be the owner, director or somebody with specialist skills. While policies vary, benefits include protecting profits and covering salaries and/or dividends.

You may also be able to add critical illness cover if a key person can’t work due to serious illness.

2.    Share and partnership protection

This helps owners keep control of their company if their business partner dies or becomes seriously unwell. Whether you take share or partnership protection depends on whether you have a limited company or partnership. 

The company takes out a life insurance policy on the life of each shareholder to the value of each share within the business. Partnership protection works in a similar way, allowing for a smooth transition of ownership.

The scenario below shows how share protection can be the difference between a business surviving or folding.

Two brothers set up a business as equal shareholders. They don’t have any business protection. Unexpectedly, one of the brothers dies. His 50% ownership now passes to his wife, who relies on the business income to support her and her two children. She wants to sell her shares to the remaining brother as she’s not involved in the business. However, he’s unable to buy her out due to insufficient cash flow. The business folds.

If an insurance plan had been in place, it would have triggered a payment into the business, allowing the surviving brother to purchase the shares and keep the business going. Meanwhile, the wife could continue to provide for her family on the sale of the shares, either choosing a lump sum payment or converting it into a regular income stream.

Finally, business protection has other benefits besides peace of mind. The insurance premiums are tax-deductible against your firm’s profits, and, when paid out, the proceeds from the policy are tax-free.

If you’re a business owner without protection in place for you or your business, contact me today for a no-obligation meeting. We can discuss your options for safeguarding your business and family should the worst happen.

¹State of the Nation Report from Legal & General published on 28 August 2019 and updated 18 December 2023 state-of-the-nation-report-w13220.pdf (cii.co.uk)

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