In the second of our wealth management related blogs we pose the question: Would your Business survive if you were not there to lead it? Every successful businessman or woman knows that a business’s most important assets are the people within it. These people will steer the business in the right direction, make the tough decisions and ultimately decide its fate. In the second of our protection themed blogs, we look at individuals as the heart of any business and the consequences of not having adequate insurance in place.
What is Shareholder/Partnership Protection?
If a shareholder or partner dies, or becomes critically ill, the insurance policy ensures that a pre-arranged sum of money is made available for the other business owners to purchase the business interest of the deceased/ill individual. This minimises any interruption to the business whilst also compensating the partner/shareholder, or their family. This takes away the potential financial burden and worry at what can be a very stressful time and helps to alleviate the risk of potential fallouts.
What is Key Person Protection?
A business could suffer a devastating financial loss in the event of the death, critical illness or incapacity of a key individual. Key person protection is intended to cover future loss of profits, so a lump sum received by the business at this time could be critical to ensure continuity of the business. The cover is taken out by the business on the life of someone who is crucial to the business in terms of knowledge, skill, expertise, contacts or profit generation.
Proceeds of a claim can, for example, be used to find a replacement employee, protect loss of profit or clear business debt. In its simplest form Key Person insurance can help keep the business trading.
What is a Relevant Life Plan?
A Relevant Life Plan is a life assurance plan which can include critical illness, that provides benefits for employees of a business. The plan itself is established and paid for by the Company on the life of the employee or director, the aim is to provide a lump sum on death which would be paid to the individual’s family. Relevant Life Plans are particularly suitable for businesses that do not have enough eligible employees to warrant a group life scheme or high earning employees and directors who have substantial pension funds and do not want their death in service benefits to form part of their Lifetime Allowance.
Contributions will be paid for by the company, they will not be treated as a benefit in kind so will not be taxable on the life assured. This can provide a significant tax saving, particularly for higher rate and additional rate taxpayers. Furthermore, the contributions paid to fund the plan should be treated as an allowable business expense. The cover itself will be calculated on a multiple of salary. The definition of salary can include regular dividends paid in lieu of salary, bonuses and any benefits in kind.
The following example compares the net cost to the employer:
| Employee Owned Plan | Relevant Life Plan | |
| Contribution | £1,000 | £1,000 |
| Employee Income tax (40%) | £690 | |
| Employee’s NI Contribution (2%) | £34 | |
| Gross Cost to Employer | £1,962 | £1,000 |
| Corporation Tax Relief (19%) | (£372) | (£190) |
| Net Cost to Employer | £1,590 | £810 |
If you would like further information, please contact the team at William Duncan + Co. We can make an introduction for you to our local trusted advisors, who can help make sure you are prepared, by offering tailored solutions to ensure that your business survives if the unexpected happens.
