BUSINESS PROTECTION GUIDE | McCoy Mortgages

BUSINESS INSURANCE IS ALL ABOUT LOOKING AFTER YOUR BUSINESS,

SO IT CAN LOOK AFTER YOU & YOUR FAMILY

You would probably find it unthinkable not to have insurance protecting your business from burglary, fire or flood. However, the effects of losing one of your directors, partners or key employees through illness or death could be much more disastrous. Any business can face the unexpected at any time.

At KMA Finance we know how hard it is to work your way around the mountains of options there are for insurance and so we want to make it simple for you, because we like simple. So at KMA Finance we have produced a guide to help you find out what you need and what you don't.

Being a business owner can be stressful,

but insuring your company correctly is vital to ensure that unforeseen difficulties don't bring you down.

The survival of your business is critical to you, your family and your employees. With so many relying on your business it is important that you protect it from all eventualities, whether that is the failure of a supplier, or a fire or flood that puts your premises out of action for months on end. You should give the utmost importance to arranging suitable cover. Although the only a legal requirement on your part is to have employer’s liability cover, we recommend most strongly that you take out comprehensive insurance to protect your business. The information in this guide will help you make a decision about the type of cover you require and should consider.

Checklist for buying commercial insurance

You don't want to spend more than necessary on your cover but there are mistakes you should avoid, such as reducing your sum insured and risk finding out the hard way that your business ins't properly insured. However, you could follow the hints and tips below to help you get the correct level at the correct price.

Increase your excess. As most policies come with a compulsory excess you could consider increasing this to lower the premiums, but be aware that you are sure you can pay the excess if you need to make a claim.
Product features. You need to sit down and make a list of all the features that are important to your business as some features will be compulsory and other non-compulsory but at the same time essential to your firm.
Risk management. Many companies overlook this important part of their coverage, however, if you have a good risk management programme then most insurance providers will reward you with a more affordable policy. You may want to investigate Business Continuity Management in more detail. This is a management process that provides a framework to ensure the resilience of your business and to help provide continuity of service to your customers. It provides a basis for planning to guarantee your long term ability to continue trading following a disruptive event. After all it is better to plan for an incident rather than being in panic mode if something bad happens to your business.

Commercial property insurance

If you own your property you trade from commercial property insurance is essential, because it allows you to protect your property, supplies and equipment from potential disaster.

Just consider the catastrophic consequences for your business if it were to suffer a major fire or theft, or if it suffered weather damage. Whether you own an office, shop or site, damage to your property could result in catastrophic loss of trade and income. With a commercial insurance policy you can be safe in the knowledge that you are at least protected financially against unforeseen circumstances.

Commercial property insurance is designed to cover buildings used for commercial purposes and can include shops, offices, warehouses, surgeries and takeaways for example. You may be an owner occupier or a landlord who is letting commercial tenants use the building in return for a rental income.

As with all insurance every policy has exclusions so it's essential you check the terms and conditions thoroughly and understand fully what you are purchasing. You should also check out the claims procedure of the insurance provider as this can vary from company to company.

How is my premium calculated?

There are a number of different factors that will affect how your premium is calculated:
Your postcode. This will tell the insurer if your property is susceptible to flood or subsidence damage, or is located in a higher risk area.

Your security.

Is your property protected by an alarm system? Does it have shutter and grills? The better the security the lower the premium will be.

The type of building.

The construction of the premises is of great interest to your insurance provider as this may affect what happens to the building in the event of a fire for example.

What the building is being used for.

A standard small office will be at the lower end of the risk scale while a takeaway shop has more associated risks and will attract thus a higher premium.

Risk prevention.

If you have spent money on items such as a sprinkler system this will lower your premiums as it will help limit any potential damage to the property.

Office insurance

This type of cover tends to include a wide variety of features that can vary considerably from provider to provider so you need to examine the fine print.

Buildings and contents, public and employers' liability cover and property damage all tend to be compulsory covers on a standard office policy but if you wanted to add less common features like terrorism, employee dishonesty and computer breakdown these would be an additional extra to your cover.

You also have the option to extend the excesses on certain policy features if you require. For example you may wish to bolt on business travel to keep you and your employees covered no matter where they might be working. You may also want to consider adding employee dishonesty cover that protects your firm against losses caused directly by theft, fraud or dishonesty committed by an employee.

As there is so much choice in the market it is important when you are sourcing a policy to compare them on a like-for-like basis. You have to consider that the cheapest option it is not necessarily the best option. For example, if you are considering purchasing your office insurance online, then make sure you pay attention to the small print. It may well be better to discuss your needs in detail with, and arrange your policy through, a knowledgeable broker.

Retail/shop insurance

If you own a shop and require this type of insurance then there are certain precautions that you need to take to ensure that any potential accidents don’t turn into a major catastrophe.

When arranging your shop insurance you should consider the following cover:

Public liability. This would cover you against any claim from a member of the public if they were to become injured or their property damaged while in contact with your business.
Employers’ liability. If you employ staff you are required by law to have this insurance.
Shop building. This cover will protect your premises if they were damaged by fire, flood or theft.
Shop stock and contents. This protects your stock rather than your premises.
Business interruption. would you protect your lost income and continue trading if your business was required to shut down for a significant period of time? Business interruption would cover the lost income as well as any additional expenditure incurred while your business was out of action.

By law, if you own a shop you must carry a minimum amount of employers’ liability insurance; in addition the majority of businesses carry additional public liability coverage.

As you will have daily interaction with the general public you must factor this into any decisions you make about the level of cover that your business requires – as well as any exposure that it may face. It may help to sit down and make a list of all potential risks to your business and discuss it with your insurance broker or provider.

Tradesman's policies

The term tradesman covers a wide variety of professions including plumbers, electricians, carpenters, builders and decorators. Whatever job you might be in the last thing you want to be facing is an insurance claim for property damage or injury from an irate client.

One important cover that you require as a tradesman is public liability cover. This insurance covers any awards of damages given to a member of the public because of an injury or damage to their property caused by you or your business. It also covers any related legal fees, costs and expenses. The typical level of cover that you should consider would be at least £1m.

Personal accident cover is very important to a tradesman and can include benefits against death, loss of limbs, permanent total disability and temporary total disability.

You also need to consider that without the relevant tools and equipment you would be unable to perform your job, which makes tool cover a crucial element of your insurance. With the loss of your tools covered you have the peace of mind that they can be replaced quickly with the minimum of disruption to your business if they were to be lost or stolen. You usually buy tools cover as an add-on to a business insurance policy and some policies only cover tools kept in a vehicle overnight if the vehicle is locked in a garage.

Sole traders

As a sole trader you alone are responsible for the continuation and success of your business. It's all down to your hard work, skills, judgement and drive.

Because your income and family finances are probably reliant on the business, that’s why you’ve almost certainly insured the business against threats such as fire and flood, and legal problems such as a claim for damages by a member of the public.

But what about the risks that you face personally?

Without you there is no business, and without your business, your family's finances might collapse.

If you were to die or suffer a serious illness that leaves you unable to work, your family could face serious financial problems very quickly. So doesn’t it make sense to treat it like any other business risk and put plans in place to help to protect yourself and the people you care about?

This guide has been based on our understanding of current legislation and looks at the ways you can gain peace of mind by knowing that your and your family’s financial future are protected. Quite simply, if you die your business will probably cease to exist, almost overnight. And with your income gone, how will your family pay the mortgage and meet the other bills? It could also happen if you fall seriously ill or are unable to work for a prolonged period due to ill health.

You might think your business could be sold, but this could be difficult without you there to run it. Even if the business could be sold, who would buy it? And for how much? Are these problems you want your dependants to inherit, or for you to sort out whilst ill?

While these aren’t pleasant things to think about, it is important to make plans to help protect the people you care about.

QUESTION... What happens to your business if you die?

A possible solution

Life insurance pays out a cash sum on the death of the person whose life is insured. So by taking out a life insurance plan you can help your family to be more financially secure if the worst does happen.

The amount and type of cover you’ll need will depend on your individual circumstances. If you have a mortgage then you’ll almost certainly want it to be fully paid off in the event of your death and, as a sole trader, you may have business loans that you also want repaid.

You might need life cover to last for a fixed period or for your whole lifetime. You might want the amount of cover to be level for the whole term, or higher at the beginning but then falling off as your mortgage is paid down and your children cease to be dependent.

At KMA Finance we are dedicated to helping make sure our customers have the right cover, arranged in the right way, for the benefit of the right people. We will help you to work out what’s best, always taking into account your budget and individual circumstances. Our promise to you is too ensure you know what level of cover you should have, and we will never try to sell you more than you want.

QUESTION... What happens to your business if you become seriously ill?

A possible solution

Critical illness cover pays out a cash sum if you are diagnosed with one of the illnesses covered in a critical illness plan. These will include cancer, heart attack and stroke and we will inform you of all the illnesses covered when arranging the insurance.

By taking out a critical illness plan you are more likely to have the money and time you need to recuperate without the pressure and worry of having to rush back to work to keep your business running. Your family could also be more financially secure if did became critically ill. Critical illness cover can usually be incorporated into a life insurance plan, thereby saving money through reduced premiums.

QUESTION... What happens if you’re unable to work because of illness or injury?

A possible solution

Income protection insurance pays a regular income if you have an illness or accident that prevents you from working.

The maximum amount of income you can replace through insurance is broadly the after-tax earnings you have lost less an adjustment for any State Benefits you can claim. This usually translates into a maximum of about 50% to 65% of your before-tax earnings.

You can reduce the payments you make to a plan by opting for a longer period before the first payment is claimed. This is called a ‘deferred period’. The longer the deferred period you choose, the lower your premiums will be. Deferred periods typically last from one month to one year.

Partnerships

Safeguarding your partnership

Being in a business partnership means overcoming constant challenges. When things go well thanks to the skills and efforts of you and your fellow partners it can be very rewarding. But when something goes wrong, which could well be for reasons outside your control, your family’s financial security and that of your partners can be at risk.

The death or serious illness of a key person in your business – whether they’re a partner or a highly valued employee – could threaten everything you’ve worked so hard to achieve. So it makes sense to treat it like any other risk and put plans in place to protect against the unforeseen.

If you were to die or be diagnosed with a critical illness that meant you were unable to work, what would happen to your share of the partnership? If your family inherits your share of the partnership on your death, they are unlikely to be able to take over your role in the business. Even if the other partners were prepared to accept them, they probably don't have the same skills, knowledge and experience as you.

Depending on how your business is set up, you or your family will have one or more options:

Take a share of the profits – but this could amount to little or nothing if the business is struggling because of your absence.
Insist on winding up the business and receive a share of its value – but if there were no assets and the business had no value they’d receive nothing.
Sell the share – but this relies on finding a buyer who’s prepared to pay a fair price, and who has the money. This can be a potentially long and difficult process.

As you can see, none of these options may give you or your family the full financial value of your partnership share. However, with some forward planning you could create a much more attractive alternative.

QUESTION... How to Protect your family if anything should happen to you

Possible solution

One solution could be for the partnership to take out a life insurance and critical illness plan to cover your life, which is then put in trust for the other partners. Then if you die or are diagnosed with one of the critical illnesses covered by the plan, the remaining partners will have the money to buy you or your family out of the partnership. This will also supplement any personal protection plans you’ve already made. This helps to ensure continuity and stability for the business and helps to provide financial security for your family.

To make this happen there has to be a business succession plan in place, with everything correctly established, formally documented and agreed with your fellow partners.

The partners in your business are its driving force and the foundations for its success. So what would happen if one of them was no longer there? In the previous section we looked at the problem from a personal and family perspective – now let’s look at it from a business perspective.

Usually each person in a partnership is guaranteed certain rights. The exact rights vary from business to business but will typically include:

the right to receive a share of the partnership’s profits, and
the right, in given circumstances, to insist that the partnership is wound up and to receive a share of the partnership’s value.

Now imagine the rights of one your partners ended up in the hands of someone you don’t know, and who doesn’t know your business. This could be exactly what happens if one of your partners becomes seriously ill or dies – their share could pass to someone else either through sale or inheritance.

QUESTION... How to Protect the future of your partnership if anything happened to a co-partner

Possible solution

To avoid the risk of rights in your business passing to the wrong person, you need to establish a legal framework that gives you and the other remaining partners the right to buy out the share of any partner who becomes seriously ill or dies. This will help to ensure the business remains in the right hands.

However, while a legal framework can ensure you have the right to buy the share, it can’t ensure you have the money needed to exercise that right. This is where life insurance and critical illness cover come in.

A life insurance plan pays out a cash sum if the person who is covered dies, a critical illness plan does the same if the person covered is diagnosed with one of the critical illnesses covered by the plan. By taking out these plans on the life of each partner and putting them in trust for all the other partners, the remaining partners will receive a cash sum when they need it.

While the partners provide the foundation of your business, there are likely to be other people also making a vital contribution to its success. If one of these key people died, was diagnosed with one of the critical illnesses covered by a plan, or was off work for an extended period due to illness or injury, how would it affect your partnership’s ability to compete and succeed? The loss of a key person can cause far-reaching problems for a business:

Loss of relationships – people like to deal with people they know and losing a key person can mean losing customers to your competitors and may lead to lower profits.
Loss of professional expertise – specialist skills and experience of your business can be difficult to replace and their loss could seriously affect your competitiveness.
Cost of recruitment – competitive job markets mean finding and training a replacement can be expensive and time-consuming.

All of these issues could affect the profitability of your partnership – unless you’re financially prepared in advance.

QUESTION... Protecting your profits

Possible solution

By taking out life assurance and critical illness plans on the life of each of the partnerships key people, for an amount to compensate the partnership for the loss of profits resulting from the death or critical illness of a key person, the partnership can receive a cash sum should the unexpected happen.

An income protection plan may also be set up on the same basis as a life assurance and critical illness plan, which will provide a regular income for the partnership if a key person is absent for an extended period due to illness or injury.

Limited companies

If you died or were to be diagnosed with a critical illness that meant you were unable to work, what would happen to your shares in the company? If your family inherits your shares on your death, are they able to take over your role in the company? Even if your co-directors – those who control and run the company – are prepared to buy your shares, do they have the funds available to be able to buy them?

Depending on the way your company is set up and the extent of the shareholding, you or your family will have one or more options:

Take a share of the company’s profits – but this could amount to little or nothing if the company is struggling because of your absence.
Insist on winding up the company and receive a share of its value – but if there were no assets and the company had no value they’d receive nothing.
Sell your shares to remaining co-directors.
Sell the shares – but this relies on finding a buyer who’s prepared to pay a fair price, and who has the money. This can be a potentially long and difficult process.

As you can see, none of these options may give you or your family the full financial value of your shareholding. It may not give them the security you would have wanted. However, with some forward planning you could create a much more attractive alternative.

QUESTION… How do you protect your family if anything happened to you?

A possible solution

One solution is for each director to take out life assurance and critical illness plans to cover their life, which are then put in trust for the other directors. Then if you die or are diagnosed with one of the critical illnesses covered by a plan, the remaining directors will have the money to buy you or your family out of the company. This will also supplement any personal protection plans you’ve already made. This helps to ensure continuity and stability for the business and helps to provide financial security for your family.

To make this happen there has to be a business succession plan in place, with everything correctly established, formally documented and agreed with your fellow directors.

With you, the co-directors in your company are its driving forces and the foundations for its success. So, what would happen if one of them were no longer there?

Imagine that the shares of one of your co-directors ended up in the hands of someone you don’t know, and who doesn’t know your company. This could be exactly what happens if one of your co-directors becomes critically ill or dies – their share in the company could pass to someone else through either sale or inheritance. the tax position may change in the future.

QUESTION… How do you protect the future of your company if anything happened to a co-director?

Possible solution

To avoid the risk of shares in your company passing to the wrong person, you need to establish a legal framework that gives you and the other remaining co-directors the ability to buy out the shares of any co-director who becomes critically ill or dies. This will help to ensure the shares in the company remain in the right hands and that any dependants receive the financial value of the shares.

However, while a legal framework can ensure you have the ability to buy, it can’t ensure you have the money you need to exercise that right. This is where life insurance and critical illness cover come in.

A life insurance plan pays out a cash sum if the person who is covered dies. A critical illness plan does the same if the person covered is diagnosed with one of the critical illnesses specified in the plan. By taking out these plans on the life of each of the co-directors and putting them in trust for all the other co-directors, they will receive a cash sum when they need it.

Has your company borrowed money from the bank or from one of the co-directors? Does it have an overdraft?
If so, the death of one of the co-directors could cause the lender to call in the loan, often very suddenly. Where
would the money come from to repay the loan?

If a co-director dies or is diagnosed with a critical illness, can your company afford to keep going with its current
number of staff? If not, and you need to make people redundant, could the company afford to pay the redundancy payments?

QUESTION… How do you protect your business loans and financial liabilities?

Possible solution

By taking out life insurance and critical illness plans to cover the amount of the loan or expected redundancy
liability, should one of you die or be diagnosed with a critical illness, the company will have the cash sum available
to pay for these.

While the co-directors provide the foundation of your company, there are likely to be other people who also make a vital contribution to its success.

If one of these key people died, was diagnosed with critical illnesses or was off work for an extended period
due to illness or injury, how would it affect your company’s ability to trade profitably now and in the future? The loss
of a key person can cause far-reaching problems for a business:

Loss of relationships – people like to deal with people they know and losing a key person can mean losing customers to your competitors and may lead to lower profits.
Loss of professional expertise – specialist skills and experience of your business can be difficult to replace and their loss could seriously affect your competitiveness.
Cost of recruitment – competitive job markets mean finding and training a replacement can be expensive and time-consuming. All of these issues could affect the profitability of your partnership – unless you’re financially prepared in advance.

QUESTION… How do you Protect your profits?

Possible solution

One solution is for your company to take out life insurance and critical illness cover on the lives of its key

people. This will help to compensate the company for any loss of profits, should a key person die or be diagnosed with one of the critical illnesses covered by the plan.

An income protection plan may also be set up on the same basis. This will provide the business with a regular income if a key person is absent for an extended period due to illness or injury.

Business protection

Read below why every business should seriously consider director/shareholder/key person and loan protection

Having worked so hard to build up your business, you might be horrified to learn you may be putting it all at risk by not having adequate protection in place.

You would probably find it unthinkable not to have insurance protecting your business from burglary, fire or flood. However, the effects of losing one of your directors, partners or key employees through illness or death could be much more disastrous. Any business can face the unexpected at any time.

If a key person falls ill or dies, the immediate concern commercially is to ensure the business continues to operate until a replacement is found or your colleague returns to work. If not covered quickly, the situation could lead to lost sales, an inability to process orders or the expense of buying in outside support. And if the business has borrowings such as loans or overdrafts there may be pressure from your bank to repay the debt quickly or provide extra security.

A Business Protection policy is designed to help at these critical times, by providing extra income to protect cashflow, repay debts and ensure the business continues to operate with minimal disruption.

In addition to cashflow, there is another aspect to business protection for partnerships and companies to think about: in the event of the death of a partner or director the remaining partners must ensure that they retain control of the business. In most instances a deceased partner will leave his assets, including his share of the business, to family members - and quite often they decide to convert their share into cash by offering the shareholding for sale. Shareholder protection can provide the funds to purchase the relevant share in such an instance, leaving the business to continue without the need for potentially high borrowing.

Being a business owner can be stressful, but insuring your company correctly is vital to ensure that unforeseen difficulties don't bring you down.

The survival of your business is critical to you, your family and your employees. With so many relying on your business it is important that you protect it from all eventualities, whether that is the failure of a supplier, or a fire or flood that puts your premises out of action for months on end. You should give the utmost importance to arranging suitable cover. Although the only a legal requirement on your part is to have employer’s liability cover, we recommend most strongly that you take out comprehensive insurance on to protect your business. The information in this guide will help you make a decision about the type cover you require and should consider.

Commercial property insurance

If you own your property you trade from commercial property insurance is essential, because it allows you to protect your property, supplies and equipment from potential disaster.

Just consider the catastrophic consequences for your business if it were to suffer a major fire or theft, or if it suffered weather damage. Whether you own an office, shop or site, damage to your property could result in catastrophic loss of trade and income. With a commercial insurance policy you can be safe in the knowledge that you are at least protected financially against unforeseen circumstances.

Commercial property insurance is designed to cover buildings used for commercial purposes and can include shops, offices, warehouses, surgeries and takeaways for example. You may be an owner occupier or a landlord who is letting commercial tenants use the building in return for a rental income.

As with all insurance every policy has exclusions so it's essential you check the terms and conditions thoroughly and understand fully what you are purchasing. You should also check out the claims procedure of the insurance provider as this can vary from company to company.
How is my premium calculated?

There are a number of different factors that will affect how your premium is calculated:

Your postcode. This will tell the insurer if your property is susceptible to flood or subsidence damage, or is located in a higher risk area.
Your security. Is your property protected by an alarm system? Does it have shutter and grills? The better the security the lower the premium will be
The type of building. The construction of the premises is of great interest to your insurance provider as this may affect what happens to the building in the event of a fire for example
What the building is being used for. A standard small office will be at the lower end of the risk scale while a takeaway shop has more associated risks and will attract thus a higher premium
Risk prevention. If you have spent money on items such as a sprinkler system this will lower your premiums as it will help limit any potential damage to the property.

Office insurance

This type of cover tends to include a wide variety of features that can vary considerably from provider to provider so you need to examine the fine print.

Buildings and contents, public and employers' liability cover and property damage all tend to be compulsory covers on a standard office policy but if you wanted to add less common features like terrorism, employee dishonesty and computer breakdown these would be an additional extra to your cover.

You also have the option to extend the excesses on certain policy features if you require. For example you may wish to bolt on business travel to keep you and your employees covered no matter where they might be working. You may also want to consider adding employee dishonesty cover that protects your firm against losses caused directly by theft, fraud or dishonesty committed by an employee.

As there is so much choice in the market it is important when you are sourcing a policy to compare them on a like-for-like basis. You have to consider that the cheapest option it is not necessarily the best option. For example, if you are considering purchasing your office insurance online, then make sure you pay attention to the small print. It may well be better to discuss your needs in detail with, and arrange your policy through, a knowledgeable broker.

Retail/shop insurance
If you own a shop and require this type of insurance then there are certain precautions that you need to take to ensure that any potential accidents don’t turn into a major catastrophe.

When arranging your shop insurance you should consider the following cover:

Public liability

This would cover you against any claim from a member of the public if they were to become injured or their property damaged while in contact with your business.

Employers’ liability

If you employ staff you are required by law to have this insurance.

Shop building

This cover will protect your premises if they were damaged by fire, flood or theft.

Shop stock and contents

This protects your stock rather than your premises.

Business interruption

How would you protect your lost income and continue trading if your business was required to shut down for a significant period of time? Business interruption would cover the lost income as well as any additional expenditure incurred while your business was out of action.

By law, if you own a shop you must carry a minimum amount of employers’ liability insurance; in addition the majority of businesses carry additional public liability coverage.

As you will have daily interaction with the general public you must factor this into any decisions you make about the level of cover that your business requires – as well as any exposure that it may face. It may help to sit down and make a list of all potential risks to your business and discuss it with your insurance broker or provider.

Tradesman's policies

The term tradesman covers a wide variety of professions including plumbers, electricians, carpenters, builders and decorators. Whatever job you might be in the last thing you want to be facing is an insurance claim for property damage or injury from an irate client.

One important cover that you require as a tradesman is public liability cover. This insurance covers any awards of damages given to a member of the public because of an injury or damage to their property caused by you or your business. It also covers any related legal fees, costs and expenses. The typical level of cover that you should consider would be at least £1m.

Personal accident cover is very important to a tradesman and can include benefits against death, loss of limbs, permanent total disability and temporary total disability.

You also need to consider that without the relevant tools and equipment you would be unable to perform your job, which makes tool cover a crucial element of your insurance. With the loss of your tools covered you have the peace of mind that they can be replaced quickly with the minimum of disruption to your business if they were to be lost or stolen. You usually buy tools cover as an add-on to a business insurance policy and some policies only cover tools kept in a vehicle overnight if the vehicle is locked in a garage.

Checklist for buying commercial insurance

You don't want to spend more than necessary on your cover but there are mistakes you should avoid, such as reducing your sum insured and risk finding out the hard way that your business ins't properly insured. However, you could follow the hints and tips below to help you get the correct level at the correct price.

Increase your excess. As most policies come with a compulsory excess you could consider increasing this to lower the premiums, but be aware that you are sure you can pay the excess if you need to make a claim.

Product features. You need to sit down and make a list of all the features that are important to your business as some features will be compulsory and other non-compulsory but at the same time essential to your firm.

Risk management. Many companies overlook this important part of their coverage, however, if you have a good risk management programme then most insurance providers will reward you with a more affordable policy. You may want to investigate Business Continuity Management in more detail. This is a management process that provides a framework to ensure the resilience of your business and to help provide continuity of service to your customers. It provides a basis for planning to guarantee your long term ability to continue trading following a disruptive event. After all it is better to plan for an incident rather than being in panic mode if something bad happens to your business.

Business protection

Read below why very business should seriously consider director/shareholder/key person and loan protection

Having worked so hard to build up your business, you might be horrified to learn you may be putting it all at risk by not having adequate protection in place.

You would probably find it unthinkable not to have insurance protecting your business from burglary, fire or flood. However, the effects of losing one of your directors, partners or key employees through illness or death could be much more disastrous. Any business can face the unexpected at any time.

If a key person falls ill or dies, the immediate concern commercially is to ensure the business continues to operate until a replacement is found or your colleague returns to work. If not covered quickly, the situation could lead to lost sales, an inability to process orders or the expense of buying in outside support. And if the business has borrowings such as loans or overdrafts there may be pressure from your bank to repay the debt quickly or provide extra security.

A Business Protection policy is designed to help at these critical times, by providing extra income to protect cashflow, repay debts and ensure the business continues to operate with minimal disruption.

In addition to cashflow, there is another aspect to business protection for partnerships and companies to think about: in the event of the death of a partner or director the remaining partners must ensure that they retain control of the business. In most instances a deceased partner will leave his assets, including his share of the business, to family members - and quite often they decide to convert their share into cash by offering the shareholding for sale.

Shareholder protection can provide the funds to purchase the relevant share in such an instance, leaving the business to continue without the need for potentially high borrowing.

If you are in business - make sure you have cover

Sole traders

As a sole trader you alone are responsible for the continuation and success of your business. It's all down to your hard work, skills, judgement and drive.

Because your income and family finances are probably reliant on the business, that’s why you’ve almost certainly insured the business against threats such as fire and flood, and legal problems such as a claim for damages by a member of the public.

But what about the risks that you face personally?

Without you there is no business, and without your business, your family's finances might collapse.

If you were to die or suffer a serious illness that leaves you unable to work, your family could face serious financial problems very quickly. So doesn’t it make sense to treat it like any other business risk and put plans in place to help to protect yourself and the people you care about?

This guide has been based on our understanding of current legislation and looks at the ways you can gain peace of mind by knowing that your and your family’s financial future are protected.

What happens to your business if you die?

The need

Quite simply, if you die your business will probably cease to exist, almost overnight. And with your income gone, how will your family pay the mortgage and meet the other bills?

You might think your business could be sold, but this could be difficult without you there to run it. Even if the business could be sold, who would buy it? And for how much? Are these problems you want your dependants to inherit?

While these aren’t pleasant things to think about, it is important to make plans to help protect the people you care about.

A possible solution

Life insurance pays out a cash sum on the death of the person whose life is insured. So by taking out a life insurance plan you can help your family to be more financially secure if the worst does happen.

The amount and type of cover you’ll need will depend on your individual circumstances. If you have a mortgage then you’ll almost certainly want it to be fully paid off in the event of your death and, as a sole trader, you may have business loans that you also want repaid.

You might need life cover to last for a fixed period or for your whole lifetime. You might want the amount of cover to be level for the whole term, or higher at the beginning but then falling off as your mortgage is paid down and your children cease to be dependent.

At KMA Finance we are dedicated to helping make sure our customers have the right cover, arranged in the right way, for the benefit of the right people. We will help you to work out what’s best, always taking into account your budget and individual circumstances. Our promise to you is too ensure you know what level of cover you should have, and we will never try to sell you more than you want.

What happens to your business if you become seriously ill?

A possible solution

Critical illness cover pays out a cash sum if you are diagnosed with one of the illnesses covered in a critical illness plan. These will include cancer, heart attack and stroke and we will inform you of all the illnesses covered when arranging the insurance.

By taking out a critical illness plan you are more likely to have the money and time you need to recuperate without the pressure and worry of having to rush back to work to keep your business running. Your family could also be more financially secure if did became critically ill. Critical illness cover can usually be incorporated into a life insurance plan, thereby saving money through reduced premiums

What happens if you’re unable to work because of illness or injury?

A possible solution

Income protection insurance pays a regular income if you have an illness or accident that prevents you from working.

The maximum amount of income you can replace through insurance is broadly the after-tax earnings you have lost less an adjustment for any State Benefits you can claim. This usually translates into a maximum of about 50% to 65% of your before-tax earnings.

You can reduce the payments you make to a plan by opting for a longer period before the first payment is claimed. This is called a ‘deferred period’. The longer the deferred period you choose, the lower your premiums will be. Deferred periods typically last from one month to one year.

Partnerships

Safeguarding your partnership

Being in a business partnership means overcoming constant challenges. When things go well thanks to the skills and efforts of you and your fellow partners it can be very rewarding. But when something goes wrong, which could well be for reasons outside your control, your family’s financial security and that of your partners can be at risk.

The death or serious illness of a key person in your business – whether they’re a partner or a highly valued employee – could threaten everything you’ve worked so hard to achieve. So it makes sense to treat it like any other risk and put plans in place to protect against the unforeseen.

Protecting your family if anything should happen to you

The need

If you were to die or be diagnosed with a critical illness that meant you were unable to work, what would happen to your share of the partnership? If your family inherits your share of the partnership on your death, they are unlikely to be able to take over your role in the business. Even if the other partners were prepared to accept them, they probably don't have the same skills, knowledge and experience as you.

Depending on how your business is set up, you or your family will have one or more options:

Take a share of the profits – but this could amount to little or nothing if the business is struggling because of your absence.
Insist on winding up the business and receive a share of its value – but if there were no assets and the business had no value they’d receive nothing.
Sell the share – but this relies on finding a buyer who’s prepared to pay a fair price, and who has the money. This can be a potentially long and difficult process.

As you can see, none of these options may give you or your family the full financial value of your partnership share. However, with some forward planning you could create a much more attractive alternative.

Possible solution

One solution could be for the partnership to take out a life insurance and critical illness plan to cover your life, which is then put in trust for the other partners. Then if you die or are diagnosed with one of the critical illnesses covered by the plan, the remaining partners will have the money to buy you or your family out of the partnership. This will also supplement any personal protection plans you’ve already made. This helps to ensure continuity and stability for the business and helps to provide financial security for your family.

To make this happen there has to be a business succession plan in place, with everything correctly established, formally documented and agreed with your fellow partners.

Protecting the future of your partnership if anything happened to a co-partner

The need

The partners in your business are its driving force and the foundations for its success. So what would happen if one of them was no longer there? In the previous section we looked at the problem from a personal and family perspective – now let’s look at it from a business perspective.

Usually each person in a partnership is guaranteed certain rights. The exact rights vary from business to business but will typically include:

the right to receive a share of the partnership’s profits, and
the right, in given circumstances, to insist that the partnership is wound up and to receive a share of the partnership’s value.

Now imagine the rights of one your partners ended up in the hands of someone you don’t know, and who doesn’t know your business. This could be exactly what happens if one of your partners becomes seriously ill or dies – their share could pass to someone else either through sale or inheritance.

Possible solution

To avoid the risk of rights in your business passing to the wrong person, you need to establish a legal framework that gives you and the other remaining partners the right to buy out the share of any partner who becomes seriously ill or dies. This will help to ensure the business remains in the right hands.

However, while a legal framework can ensure you have the right to buy the share, it can’t ensure you have the money needed to exercise that right. This is where life insurance and critical illness cover come in.

A life insurance plan pays out a cash sum if the person who is covered dies, a critical illness plan does the same if the person covered is diagnosed with one of the critical illnesses covered by the plan. By taking out these plans on the life of each partner and putting them in trust for all the other partners, the remaining partners will receive a cash sum when they need it.

Protecting your profits

The need

While the partners provide the foundation of your business, there are likely to be other people also making a vital contribution to its success. If one of these key people died, was diagnosed with one of the critical illnesses covered by a plan, or was off work for an extended period due to illness or injury, how would it affect your partnership’s ability to compete and succeed? The loss of a key person can cause far-reaching problems for a business:

Loss of relationships – people like to deal with people they know and losing a key person can mean losing customers to your competitors and may lead to lower profits.
Loss of professional expertise – specialist skills and experience of your business can be difficult to replace and their loss could seriously affect your competitiveness.
Cost of recruitment – competitive job markets mean finding and training a replacement can be expensive and time-consuming.

All of these issues could affect the profitability of your partnership – unless you’re financially prepared in advance.

Possible solution

By taking out life assurance and critical illness plans on the life of each of the partnerships key people, for an amount to compensate the partnership for the loss of profits resulting from the death or critical illness of a key person, the partnership can receive a cash sum should the unexpected happen.

An income protection plan may also be set up on the same basis as a life assurance and critical illness plan, which will provide a regular income for the partnership if a key person is absent for an extended period due to illness or injury.

Limited companies

Protecting your family if anything happened to you

The need

If you died or were to be diagnosed with a critical illness that meant you were unable to work, what would happen to your shares in the company? If your family inherits your shares on your death, are they able to take over your role in the company? Even if your co-directors – those who control and run the company – are prepared to buy your shares, do they have the funds available to be able to buy them?

Depending on the way your company is set up and the extent of the shareholding, you or your family will have one or more options:

• Take a share of the company’s profits – but this could amount to little or nothing if the company is struggling because of your absence.

• Insist on winding up the company and receive a share of its value – but if there were no assets and the company had no value they’d receive nothing.

• Sell your shares to remaining co-directors.

• Sell the shares – but this relies on finding a buyer who’s prepared to pay a fair price, and who has the money. This can be a potentially long and difficult process.

As you can see, none of these options may give you or your family the full financial value of your shareholding. It may not give them the security you would have wanted. However, with some forward planning you could create a much more attractive alternative.

A possible solution

One solution is for each director to take out life assurance and critical illness plans to cover their life, which are then put in trust for the other directors. Then if you die or are diagnosed with one of the critical illnesses covered by a plan, the remaining directors will have the money to buy you or your family out of the company. This will also supplement any personal protection plans you’ve already made. This helps to ensure continuity and stability for the business and helps to provide financial security for your family.

To make this happen there has to be a business succession plan in place, with everything correctly established, formally documented and agreed with your fellow directors.

Protecting the future of your company if anything happened to a co-director

The need

With you, the co-directors in your company are its driving forces and the foundations for its success. So, what would happen if one of them were no longer there?

Imagine that the shares of one of your co-directors ended up in the hands of someone you don’t know, and who doesn’t know your company. This could be exactly what happens if one of your co-directors becomes critically ill or dies – their share in the company could pass to someone else through either sale or inheritance. the tax position may change in the future.

Possible solution

To avoid the risk of shares in your company passing to the wrong person, you need to establish a legal framework that gives you and the other remaining co-directors the ability to buy out the shares of any co-director who becomes critically ill or dies. This will help to ensure the shares in the company remain in the right hands and that any dependants receive the financial value of the shares.

However, while a legal framework can ensure you have the ability to buy, it can’t ensure you have the money you need to exercise that right. This is where life insurance and critical illness cover come in.

A life insurance plan pays out a cash sum if the person who is covered dies. A critical illness plan does the same if the person covered is diagnosed with one of the critical illnesses specified in the plan. By taking out these plans on the life of each of the co-directors and putting them in trust for all the other co-directors, they will receive a cash sum when they need it.

Protecting your business loans and financial liabilities

The need

Has your company borrowed money from the bank or from one of the co-directors? Does it have an overdraft? If so, the death of one of the co-directors could cause the lender to call in the loan, often very suddenly. Where would the money come from to repay the loan?

If a co-director dies or is diagnosed with a critical illness, can your company afford to keep going with its current number of staff? If not, and you need to make people redundant, could the company afford to pay the redundancy payments?

Possible solution

By taking out life insurance and critical illness plans to cover the amount of the loan or expected redundancy liability, should one of you die or be diagnosed with a critical illness, the company will have the cash sum available to pay for these.

Protecting your profits

The need

While the co-directors provide the foundation of your company, there are likely to be other people who also make a vital contribution to its success. If one of these key people died, was diagnosed with critical illnesses or was off work for an extended period due to illness or injury, how would it affect your company’s ability to trade profitably now and in the future? The loss of a key person can cause far-reaching problems for a business:

• Loss of relationships – people like to deal with people they know and losing a key person can mean losing customers to your competitors and may lead to lower profits.

• Loss of professional expertise – specialist skills and experience of your business can be difficult to replace and their loss could seriously affect your competitiveness.

• Cost of recruitment – competitive job markets mean finding and training a replacement can be expensive and time-consuming. All of these issues could affect the profitability of your partnership – unless you’re financially prepared in advance.

Possible solution

One solution is for your company to take out life insurance and critical illness cover on the lives of its key people. This will help to compensate the company for any loss of profits, should a key person die or be diagnosed with one of the critical illnesses covered by the plan.

An income protection plan may also be set up on the same basis. This will provide the business with a regular income if a key person is absent for an extended period due to illness or injury.

The information in this guide is general and cannot be regarded of providing a guarantee of a successful insurance application. While every effort has been made to ensure accuracy, you should not rely on it. KMA Finance cannot accept any responsibility for any errors or omissions.