When you are running a business, there are multiple issues competing for your attention at any given time. You want to make sure that your business is profitable, productive, and cost-efficient.
But sometimes the unexpected can occur, throwing your business plans off-track. It’s worth taking some time to consider where your business might be vulnerable and how to mitigate the risks.
Key Person Cover
What would happen to your business if an essential senior employee were to die?
We all know that we should have life insurance, but did you know you could arrange life insurance for employees in your business?
Key person insurance works as follows:
- The business pays a regular premium to the insurer. This is an allowable expense providing the policy is ‘wholly and exclusively’ for the purposes of trade, and not for the benefit of the other shareholders.
- If the insured person dies within the plan term, the business will receive a payout.
- You can also add critical illness cover to the policy.
- The payout is notionally taxable in the hands of the business, although if the money is used for the purposes of trade, the expenses are tax-deductible.
- The money can be used to shore up the balance sheet of a business in such an eventuality to help it cope with the impact of a death of a key employee.
Shareholder/ Partnership Protection
What would happen if you are another shareholder/partner were to die? Who would continue to have an element of control, and would they want to be involved with running the business?
Shareholder/ Partnership protection works as follows:
- The Shareholders/ Partners take out life insurance policies, one each for each of the relevant shareholders lives.
- The premiums would likely be subject to Income Tax and National Insurance, as ultimately the shareholders/ partners personally benefit. Where the business pays for the premiums, these can also be treated as allowable expenses.
- On death, the insurance is paid to the remaining Shareholders/ Partners via a Trust, to allow the remaining shareholders/ partners to have the funding to buy back shares in the deceased person’s estate with agreement from relevant parties as per a business agreement, such as a Cross Option Agreement.
- Critical illness cover can also be provided, to provide funding if a shareholder was Critically ill and didn’t wish to continue to be involved in the business.
Cross Option Agreement
A cross-option agreement is a legal document that can be used alongside a Shareholder/Partnership Protection insurance policy.
This means that if a shareholder/partner dies, the business or other shareholders have the option to purchase their shares from their estate. This protects the business, as well as providing the deceased person’s family with a lump sum, rather than the burden of owning part of a business.
The key word is ‘option.’ The agreement shows that the parties involved are willing to undertake the transaction, but it is not binding. Providing the shares are not subject to a sale agreement at the time of death, the deceased person can qualify for Business Relief, protecting their shares from Inheritance Tax. A binding agreement could invalidate this relief.
Relevant Life Cover
A relevant life plan is a death-in-service plan set up for individual directors and employees, paid for by an employer.
These plans are covered by the same legislation that deals with group schemes. However, unlike most schemes provided by large employers, they don’t fall under pensions legislation because they are ‘non-registered’.
The Relevant Life plan covers an individual in the event of death. The benefits are paid to the deceased’s nominated beneficiaries via a Trust. The premiums are funded by the company but do not create a P11d benefit tax liability for the life assured.
There are lots of good reasons to choose a relevant life plan, but it all boils down to tax-efficient life cover for directors and employees.
Power of Attorney
If you become unwell or seriously injured, who will run your business?
A business Power of Attorney allows you to appoint someone to make important decisions for you if you lose capacity.
This not only gives them authority to act in line with your wishes, but crucially, provides access to business bank accounts and other important services. This means that the business can continue to operate in your absence.
You should also consider what will happen to your business if you die.
The default option would be for your shares to pass into your estate under the terms of your Will. This could suit you if you intend to pass on a family business, or if the other shareholders are prepared to buy the shares from your estate.
However, this is subject to the terms of the company’s Articles and Memorandum, which may impose restrictions on the transfer of shares.
A business Will allows you to direct your representatives not only regarding what happens to your shares, but also how the business should be run after your death, for example, who should take on key responsibilities.
Running a business is never risk-free, but by taking a few simple steps now, you can protect your business if the worst should happen.
Employee Benefits – Protection
The business can also set up life insurance for the benefit of employees’ families.
Group life insurance is the traditional method, particularly for larger companies. This provides a lump sum to the deceased person’s estate or beneficiaries if they die within the plan term. The costs are usually competitive on a per-employee basis and the underwriting process is often simplified. The premiums are tax-deductible for the company, which makes it even more cost-effective. This can provide a valuable benefit as part of an employee’s remuneration package.
For directors and senior employees, a relevant life plan might be more appropriate, as it can offer higher levels of cover. These plans are individually underwritten and work in exactly the same way as a personal life insurance policy. However, the premiums are an allowable business expense and the benefits are free of tax. To qualify, the plan must meet certain conditions:
- The plan can only provide life cover on a single-life basis.
- The plan term must not exceed age 75.
- The cover amount is limited by a multiple of salary, for example 15 or 20 times annual earnings. This depends on the insurer’s terms.
- The plan must be written into trust, with the company as a trustee.
- The company cannot benefit from the cover.
You can also arrange income protection insurance for your employees. This will pay a regular income if they are unable to work due to illness or disability.
Group schemes usually offer competitive costs and simplified underwriting. The premiums are an allowable business expense.
If the benefits are paid to the company, the money must then be paid to the employee with deduction of tax and National Insurance.
If the benefits are paid directly to the employee, they do not pay tax, but the maximum cover amount is usually a lower proportion of their salary.
Some policies include an additional payout to the employer, which allows the company to recruit and train a replacement while the employee is out of commission.
Directors can also benefit from income protection, either as part of a group scheme or a standalone policy. This can compensate for reduced earnings or allow your share of the profits to be re-invested in the business while you are unable to work.
Income protection benefits are capped and may be reduced if you have other earnings. Dividends are not always treated in the same way as other earnings, so it’s best to check with the insurer:
- If dividend income is taken into account when calculating your maximum cover and
- If you can continue to receive dividends during a claim without reducing your cover amount.
Private Medical Insurance
Private medical insurance is another benefit that could be valuable for directors and employees. This offers the following advantages:
- It reduces waiting times for medical procedures.
- Most plans offer additional support to improve the health and wellbeing of employees.
- Costs are competitive compared with personal policies.
- Private medical insurance is a desirable perk when recruiting employees.
Review Your Financial Plan
To arrange an appointment to talk more about pensions, or any other financial planning matters, you can contact us via your usual MHA adviser, or directly on 01604 621 421 or firstname.lastname@example.org
MHA Caves Wealth is authorised and regulated by the Financial Conduct Authority (FCA), Financial Services Register number 143715.
This communication is for general information only, is a marketing communication, and is not intended to be individual investment advice, recommendation, tax, or legal advice. The views expressed in this article are those of MHA Caves Wealth or its staff and should not be considered as advice or a recommendation to buy, sell or hold a particular investment or product. In particular, the information provided will not address your personal circumstances, objectives, and attitude towards risk. Therefore, you are recommended to seek professional regulated advice before taking any action.
Potential Risks and Disadvantages
- Protection plans may expire on either a claim being made or at the end of the term if not renewed. If the policies reach the end of the term and no claim is made, there will be no benefits paid to you nor will there be a surrender value.
- If there are guaranteed premiums, once the plans are in force you will be unable to alter this.
- Underwriting terms may be applied which could increase your premium and/or discount certain conditions covered within your policy, from that covered in the Key Features Document.
- If you do not cancel your policy within the cancellation period, you may not receive a refund on your premiums paid up to this point.
- If you stop paying your premiums, your cover will stop.
- The premiums quoted may increase after medical underwriting or the level of cover offered by the insurance company could be reduced.
- If the policies being taken out are on a level basis, over time the benefit which would be received would be reduced in real terms due to the effect of inflation and could be insufficient to carry out any work required to your property or pay for treatment.
- After medical underwriting there may, be certain common conditions that will be excluded from your plan depending on your medical history.
- There is no guarantee that the new cover will be underwritten on similar terms to that of your existing cover.
- Any benefit pay out may be liable for corporation tax, reducing the total payout you may receive.
Specific to Protection Plans
- If any relevant information provided has not been disclosed accurately and honestly, this could result in any cover offered becoming invalid and may result in the non-payment of any future claims.
- It is important to regularly review your levels of cover to ensure that they remain suitable to meet your needs.
- There is no guarantee that the level of cover being applied for will be offered by the provider.
- There may be certain circumstances when the terminal illness payment will not be paid, please refer to your key features document for more information.
- There may be restrictions to your policies with regards to travel or residency. Please refer to your key features document for further details.
- After medical underwriting, your premiums may increase from those quoted within this report as these have been provided for illustrative purposes only.
- If you cancel after the first 30 days of the policy, you will not receive a refund on your premiums.
- If you cancel your policy whilst a claim is being made you may not receive a pay-out.
- Applying for the same level of cover may increase in the future.