Profit protection: protect your business from the unexpected
In general, we tend to be good at insuring things, but not so good at insuring people. This applies to life insurance, but also to business protection.
In the late 19th century, one of the world's richest men, Andrew Carnegie, commented that 'Men and women, not machines, are the real source of profits in any businesses.' As the leading industrialist of his day, he was no doubt well qualified to reflect that way.
150 years on, the adage holds as firm as ever, yet not all business owners take steps to reduce the impact on their businesses or protect their own families in the event of their untimely death or long term absence through serious illness of themselves, or indeed of key employees.
This can be resolved by taking out business protection insurance to cover for these eventualities. It is estimated that c.60% of limited companies and 50% of partnerships have no or inadequate cover. Traditionally this breaks down into two distinct forms of protection, namely business continuity planning and business succession planning.
Business continuity aims to help mitigate the effects of the death or serious illness of a key person on profits, and on the availability of business loans. Most small to medium sized businesses (SMEs) heavily rely on certain individuals who provide important intellectual capital, skills or contacts. So a policy taken out by the company on the life of that key person can fill the financial void that is generally left, and also fund the recruitment of others with those key qualities. Added to this, most business finance is offered by banks dependent upon the continuous employment of nominated key individual(s). If that key individual were no longer a part of the business, due to death or serious illness, their unexpected absence may result in the facility being withdrawn, and further borrowing rendered unlikely.
Business succession planning aims to mitigate the impact of possible loss of control of the business after the death or serious illness of a partner or shareholder, and also ensures that the beneficiaries of the estate of the deceased or ill are financially compensated. This normally requires the use of multiple policies and suitable trusts, following an examination of the company's articles of association or partnership agreement.
Because most businesses have at least one key person, plus a number of shareholders or partners, statistically the chances of such an event happening can be substantial. According to PruProtect's interpretation of British Life Tables actuarial data, in a limited company with 3 shareholding directors and a further keyperson, with an average age of 45, there is a 47% chance of one of them dying before 65. The chance of one suffering a serious illness that would force them to cease work unexpectedly is substantially greater!
Responsible employers often also consider life assurance for their employees, to provide benefit for their families should they die whilst in service. Relatively newly available are Relevant Life Policies. Crossing the divide between personal and business protection, these plans are individual life policies taken out by an employer for an employee that is fully tax/NI deductible and not a benefit in kind. This is probably the most cost effective way to establish life cover, and clearly demonstrates to staff the value their employer places upon them.
For more information or advice about profit protection for your business, contact Kellands Corporate.