Share Purchase / Partnership Protection

Long term success of business will invariably rely on the directors or partners of the business. The loss of a director / partner in the event of death, permanent disability or critical illness would likely have a significant impact on both the business and the family of the life assured. Share Purchase / Partnership Protection is designed to provide the required funds in such an event to enable the remaining shareholders / partners to buy out the life assured's shareholding / partnership from the life assured's family, thereby providing a vital resource for both parties. Often, there will be an agreement in place to deal with these events, but it will not necessarily explain where the necessary funds will be sourced from.

It is important to set up an agreement that outlines how the shares should be dealt with in the event of a claim. This type of agreement is normally structured as a Double Option agreement. It is usually preferable to have the protection policy written in trust from inception. Premiums payable on each person are likely to be different; therefore premium equalisation is important to ensure that there is a fair and equitable solution in the distribution of costs.

Key Person Protection

A business's long term success does depend largely on the employees. Key Person cover is designed to protect the business from the loss of a Key Person caused by death, permanent disability or a critical illness (on a temporary or permanent basis). A Key Person could range from being a top sales person to a director / partner of the business. The negative impact of the loss of a Key Person will likely lead to a loss of profits due to a number of issues including a loss of sales, loss of confidence by clients / banks / creditors, impact on staff morale, etc. In addition, there could be a significant cost in the replacement of the Key Person through recruitment costs, training, etc. Key Person Protection will provide the selected cash injection for the business to provide for the many requirements which may arise.

Relevant Life

Relevant Life cover is restricted to providing life cover only and must cease before the life assured's 75th birthday. It is a single life policy taken out on the life of an employee by the employer to provide a death in service benefit. The cover is designed for those who require a higher level of life cover than that already offered by the employer or where the number of employees is too low for a group scheme. Taking out a Relevant life policy could be a tax efficient way of providing valuable life cover. The cover is structured as a multiple of an employee's remuneration.

Loan Protection

Many businesses will have loans in place. Broadly speaking, these loans will either be a loan account due to a director of the business or a loan from a third party creditor such as a bank. In the case of a director loan account, protection needs to be put in place to ensure that the necessary funds are available in the event of the loss of the director to repay the director's family / estate. In the case of a third party creditor debt, often a director will have signed as guarantor for the loan and the loss of that person could have serious consequences for the business and potentially the family of the guarantor. Protection is a cost effective solution to ensure that there are the required funds to repay the loan in the event of the loss of the guarantor.

Key Person Income Protection

In the event of the Key Person being unable to work due to an accident or illness, the insurer will pay a regular amount to the employer of the life assured. This benefit can then normally be used by the employer to pay towards a replacement employee / provide towards the loss of profits.

Executive Income Protection

In the event of the Key Person being unable to work due to an accident or illness, the insurer will pay a regular amount to the employer of the life assured. The benefit is then normally used by the employer to provide towards the employee's salary while they are unable to work. The benefit is paid to the employee via the PAYE system.

Cost of protection example:

For your interest, I have provided some illustrative quotations (bearing in mind that these are samples and would be subject to change due to underwriting and other factors). You will note how factors such as smoking status and age influence the premium. When you consider the premium payable for the enormous peace of mind and the positive impact Business Protection can have on you / your family / your business in an unplanned event such as death, permanent disability, critical illness, etc, there is every reason to prioritise Business Protection planning.

This is an example of three directors who own a third each of a limited company valued at £750,000. They each wish to apply for £250,000 level term life cover in the form of Shareholder Protection for a term of 15 years.

Director 1: Male age 46, smoker, working in an administrative role, £250,000 level term life cover: Illustrative approximate monthly premium: £69

Director 2: Female age 50, non-smoker, working in an administrative role, £250,000 level term life cover: Illustrative approximate monthly premium: £39

Director 3: Male age 42, non-smoker, working in an administrative role, £250,000 level term life cover: Illustrative approximate monthly premium: £24

In the event of the above cover not being in place, consider the potential cost of the business needing to take out a bank loan of £250,000 to purchase a deceased's share of the business from the deceased's family / estate. Assuming a 9% per annum interest rate, the monthly interest payment would be approximately £1,875, bearing in mind that the capital would still need to be repaid to the bank.