A Quick Guide To Business Protection
Whether you have over 200 employees or as few as 1, running a business involves risk.
Business protection is used to mitigate these risks, particularly by supporting a business through financial difficulty or loss.
Causes of the above might include:
- Product launch delays
- Loss of customers
- Increased recruitment costs
- Financial penalties (e.g. due to late or unfinished contracts)
- A decline in sales volume
- Inadequate business plans
As financial advisers in Lincoln, we work regularly with business owners to arrange adequate protection for their companies.
It helps to know a bit about business protection before you dive in. This brief guide on the subject should help you better grasp what’s involved, and what course of action might be most appropriate for you.
First, let’s unpack business protection a bit more, before considering some practical solutions.
Types of Business & Business Protection
Business protection is essentially insurance. It provides financial cover for businesses in the event of the death of key business employees, directors or partners.
Different types of insurance exist for various kinds of business, including:
- Sole traders: You are the only owner of the business. You retain all business profits, but you are also personally responsible for any business losses. (You are allowed to employ staff, however, despite the misleading name “sole trader”).
- Partnerships: You share responsibility of the business with a partner, or set of partners. You collectively enjoy the profits, as well as share in responsibility for any losses.
- Limited Companies: Shareholders own the business. Company directors can be shareholders. Your personal finances are legally separate from those of the business.
The nature and structure of your business will affect which type of business protection is most suitable for your needs.
Types of Protection
As financial advisers in Lincoln, we often tell clients that it usually helps to understand life insurance, in order to better grasp business protection insurance.
Life insurance is a fixed-term policy, paying out a sum if the individual covered by the insurance dies within the term. The premium you pay for the policy depends on many factors, including:
- Your health
- Your age
- Length of the insurance term
- Cover type
- Desired value of the payout sum upon death
Naturally, the older and more unhealthy you are, the higher your premium is likely to be.
Business protection and personal life insurance can both pay out to one person, or to multiple people. So the two can look quite similar.
Where the former differs, however, is that it offers three distinct types of business protection:
- Business Loan Protection: Pays off business debts in the event of the owner’s death.
- Key Person Protection: If a key person is lost to illness or death, then the payout helps cover any resulting staff replacement fees and lost profits.
- Share protection: Helps provide funds to purchase the shares of a shareholder or business owner if they die.
The latter two can also provide critical illness cover as an option. This allows a payout to be made if a specified person is diagnosed with a specified illness covered under the policy (e.g. heart attack, stroke or cancer).
Which Type Of Cover Do I Need?
The answer to this depends on your type of business, your goals and needs, and the specific set of circumstances your business finds itself in.
The best course of action is to seek professional, qualified advice from a financial adviser who is experienced in business protection.
In the meantime, here are some points to get you started:
#1 List your key people
It might well be that there are just 1 or 2 people who you regard as critical to the ongoing functioning of the business. Or there may be more.
Regardless, it is crucial that you make a note of your key people, and detail what the consequences would be for your business if any of them were taken out of action.
#2 List your shareholders
If you are a limited company, how are the shares allocated, exactly?
Which people hold the biggest slices of the pie? Are any of these individuals ‘key people’?
Consider the hole that would be created if a significant shareholder were to die. Would the remaining owners be able to buy this person’s interest in the business?
#3 Survey your assets & liabilities
What reserves does the business have? Could any of these be put to good use in the event of a shareholder / key person loss?
Also, consider your outstanding business debts. What provisions are in place to settle venture capital loans, commercial mortgages and directors’ loans in the event of owner death?