As a business owner, it’s been a tough few years. Indeed, according to the Office for National Statistics, 105,300 British companies closed in the first quarter of 2023.
After navigating the effects of Covid and continually having to combat the ongoing cost of living crisis, you might be looking at ways to cut costs. That could be anything from hiring freezes or reducing the premiums you pay for vital areas of business protection, like key worker insurance.
Your people are likely to be your business’s greatest asset, so the challenges you may face if you lose a critical employee mean it’s more important than ever to look after your most experienced workers.
So, read on to find out why it’s so important to have the right insurance and protection in place for your key personnel and why you could be putting your business at risk if you decide to cut this corner.
Why key personnel are important
As a business owner, you are likely a critical member of your team. Additionally, other members of your team are likely to fall into this category, especially those with decades of experience or those in important roles.
Looking after your key workers and providing the right protection is likely to be essential to the successful operation of your company. After all, 60% of people polled by Legal & General in their 2021 ‘State of the Nation SMEs report’ said that they feared their business would cease trading within 12 months of losing a key person.
Despite this, many UK business owners don’t take out the cover they need to protect their business or are considering cancelling the cover they have in place.
In fact, a report by Allianz reveals that nearly 1 in 5 UK SMEs reduced or removed their insurance cover in the 12 months up to March 2023, with a similar number planning on doing the same in the coming year.
It’s incredibly important that you provide the cover you need to protect your business in the event of losing a key member of your team. Below are three areas of protection to consider and why it could be a risk to your business if you don’t have them.
1. Key person insurance could protect you against losing a key employee
Key person insurance provides financial support to a business if a key individual passes away or is unable to work due to a critical or terminal illness.
A key employee in your business could be:
- An owner
- A director
- A board member
- A manager
- A member of the team with important responsibilities
- Someone with specific skills that are difficult to replicate
- The top salesperson or technician.
If you suddenly lost a key person, you could see your business grind to a halt with a knock-on effect on your cash flow and profitability. Key person insurance is designed to protect your business in this very scenario.
With sufficient protection, your business will have enough money to not only fund sick pay and recruit new staff but also additional training, wages, loan repayments and invoices to suppliers that need to be paid. Plus, you could have funds available to protect against any wider impact the loss of the employee may have on the business, like a reduction in profits.
Rather than cancelling insurance, putting protection in place in uncertain times might give you the safety net you need if you were to lose a key member of staff and be unable to replace them immediately.
In addition, having key person insurance in place to cover all costs during a challenging period for the business could also give your employees and clients the peace of mind of knowing that the business is safe and secure financially for the foreseeable future.
2. Shareholder protection prevents periods of uncertainty after an owner or part-owner dies
A shareholder agreement sets out in writing what would happen to any shares in the event of an owner or part-owner dying. It can also be used when a company owner becomes seriously ill and allows them to sell their shares to others at an agreed and fair rate so that the business can continue operating.
Shareholder protection can provide the finance to fulfil the obligations of a shareholder agreement.
Without shareholder protection in place, a business could enter a period of uncertainty that could harm its financial prospects.
A deceased shareholder’s family will usually inherit a share of the business. However, this might not be of any practical use to them, and they may not be interested in being involved in the day-to-day operation of the business – they generally would just need the value the shares bring.
Shareholder protection would provide the cash you need to buy the deceased person’s shares, providing liquid assets to the family and enabling the other shareholders to retain control.
3. Relevant life cover helps support a staff member’s beneficiaries
Relevant life insurance is a form of death in service benefit that is arranged and paid for by a business. It pays out to a director or staff member’s beneficiaries upon their death or in the event they are diagnosed with a terminal illness.
This type of protection is normally used by businesses that aren’t large enough to establish a group life scheme.
Putting relevant life cover in place is an excellent perk for senior staff members, and the premiums are typically classified as a business expense. This could reduce your Corporation Tax and National Insurance liability.
Having relevant life cover in place means that any key workers and their beneficiaries are helped financially upon their death or terminal illness diagnosis, and you send the signal that you are a responsible and caring employer – potentially increasing the retention of your important staff.
Get in touch
To find out more about how you can protect your business and look after your key people, please get in touch. Email hello@sovereign-ifa.co.uk or call us on 01454 416653.
Please note
Note that protection plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse. Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.
