20 Jul 2011

The Need for Business Protection

The Need for Business Protection

Business protection helps protect a business should the worst happen to a director, shareholder, partner, member or key employee. It is often perceived as complicated but the basic principles are similar to arranging personal protection.

Peter Mutch Corporate Benefits Director, explains how to protect your business.

Business protection helps protect a business should the worst happen to a director, shareholder, partner, member or key employee. It is often perceived as complicated but the basic principles are similar to arranging personal protection.

Peter Mutch Corporate Benefits Director, explains how to protect your business.

Most businesses probably find it unthinkable not to have insurance protecting their business from the effects of fire or a burglary. However, the effect of losing one of their Directors, Partners, Shareholders or key employees could be much more difficult to recover from

What is business protection?

Business protection helps to protect your business should a director, partner or key employee suffer a critical illness or die. Financial protection is vital to allow the business to recover quickly and minimise the impact on profits should the worst happen.

Business protection can be perceived as complicated - but the basic principles are similar to arranging personal protection.

The Facts:

• 4.8m estimated Small to Medium Enterprises in the UK, employing 22.8m employees at the start of 2009

• 96% of these businesses employ less than 10 people, that is 4.6m key decision makers

• 75% of these private businesses rely on one key person, that is 3.6m individuals who are indispensable to their business.

BIS URN 10/92 Statistic Press release 13 October 2010. Estimate of the total number of private
sector enterprises in the UK at the start of 2009 and their employment and turnover.

Business protection is about protecting these people and it falls into three categories:

Key person cover

Within most businesses there will be certain individuals who, due to their specialist skills, knowledge or connections, will be vital to the profitable running of that business. If they are unable to do their job due to critical illness or death then there could be severe financial consequences. Key person cover looks to provide financial support for the business in these circumstances.

Loan protection

When a business borrows money from a bank or other financial institution, it is common that they will want some form of protection cover to repay all, or some of that loan on death or critical illness of a key person. It could also be that the business owners have lent money to their own business. These are called Director's or Partner's loan accounts and need to be repaid on death.

Partnership and shareholder protection

When an owner of a business dies, or perhaps becomes critically ill and wishes to retire from the business, then two problems can arise:

Control

It is important that the remaining shareholders or partners retain control of their business. Usually this will mean being able to purchase the business share from the retiring or deceased owner. However the ability to raise a substantial amount of capital at this time, especially if the owner was a key person in the business, is far from guaranteed. So providing funds through an appropriate protection policy is fundamental to good succession planning.

Fair value

It is also important to ensure that the sale of the business share fairly represents its value at the time of death or retirement through ill health. Without appropriate funding and an agreement that clearly defines the value then this cannot be guaranteed. Partnership or shareholder protection provides both the funds and the framework to ensure both these objectives are achieved. Most businesses probably find it unthinkable not to have insurance protecting their business from the effects of fire or a burglary. However, the effect of losing one of their key employees could be much more difficult to recover from.

Financial protection is a crucial part of the financial planning process for any business. Unfortunately, it is one area that is often overlooked. 

Please take steps to protect your business today.

Peter Mutch, Corporate Benefits Director


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