Personal protection (insurance) policies are important for anyone looking to protect themselves and their families from financial trouble during hard times. For business owners, the need for protection grows further to safeguard their financial well-being and ensure the continuity and health of their businesses.
Policies like life cover, critical illness, and income protection insurance offer a financial shield against unforeseen circumstances, from personal injury to death.
This article will outline some key personal protection policies for UK business owners.
Life Insurance for business owners
Life Insurance (also known as Life Cover) is a protection policy that pays out to beneficiaries upon the insured individual's death.
It is designed to provide a lump sum of money to loved ones left behind in the event of death. This money is typically used to cover funeral costs, remaining mortgage repayments, education fees and other expenses.
Life cover is important for everybody to consider. However, for business owners it is especially important and the number of options cause added complexity. We will outline some of these options below.
Critical illness cover
Critical illness insurance (also known as critical illness cover) is a type of insurance policy where benefits are paid on ‘survival’ (usually 28 days or so) following critical illness diagnosis.
The definition of a critical illness varies by insurer, but it is typically a serious condition such as heart attack, stroke or cancer.
Relevant life cover
With a relevant life cover policy, the business pays the insurance premiums, not the individual being insured. This may be a good option for business owners for a few reasons.
- Firstly, the person being insured won't have to pay any national insurance contributions (NICs) or income tax on the premiums. Additionally, it makes the business eligible for Corporation Tax relief, resulting in significant tax savings compared to obtaining the same coverage personally.
- The policy is single life but affected by the business rather than the individual. There is no minimum number of members necessary. This makes it a good option for providing cost-effective cover for certain individuals, for instance the business owner(s) and management team.
This type of life insurance may not be appropriate for everyone. We strongly advise seeking advice from one of our advisers to find a policy that is tailored to your specific needs and is fully compliant.
Key person protection
Many businesses rely heavily on specific individuals for their stability and success. Key person protection can help the business cope if a key employee (which can include the business owner) dies unexpectedly.
It provides the business with the necessary funds to replace lost income, pay off debts, keep operations running, and prevent business closure during a transitional period.
Key person protection can also be arranged to pay out if a key person is diagnosed with a specified critical illness (see Critical Illness cover above).
With key person protection, the business, not an individual, is the beneficiary of the policy.
Shareholder protection
Shareholder protection insurance can reduce the financial damage caused by the death or critical illness of a major shareholder. By providing the funds necessary to buy back their shares, it means the remaining shareholders/owners can:
- Maintain control and continue to run the business
- Ensure the affected partners and their estate receive a fair share price for their shares
- Optimise tax efficiency
Income Protection Insurance
Income protection is another financial safety net that pays out when an individual cannot work due to illness or injury. Unlike critical illness protection, when an Income Protection claim is approved, the insurer will pay a regular income, typically a percentage of the individual’s pre-disability earnings.
Income protection example
- A business owner purchases a £5,000 monthly income protection policy with a 30-day waiting period.
- They pay monthly premiums for this protection.
- Due to a car accident, the owner cannot work for three months.
- After the 30-day waiting period, the insurer starts paying the owner £5,000 per month for the remaining two months of disability.
For business owners, income protection provides benefits similar to critical illness coverage, including income stability, debt and expense management, and peace of mind. However, the schedule, circumstances and payout will differ.
Executive Income Protection (EIP)
Executive Income Protection (EIP) is a type of insurance that provides financial support to a business when a key employee cannot work due to sickness or injury. The money paid to the company can offset the employee’s sick pay and support their recovery.
Depending on the specific policy, Executive Income Protection can cover the employee’s earnings, dividends, P11D benefits, and potentially their pension contributions and National Insurance Contributions (NICs).
Why Independent Financial Advice is encouraged
When selecting life insurance, critical illness coverage, income protection, or other protection policies, a qualified and independent financial adviser is strongly encouraged.
Financial advisers can assess your unique circumstances, including your business, family, and financial goals, to provide personalised recommendations. They can help you identify potential risks and vulnerabilities that may uniquely impact your business as well as decide upon the necessary amount of cover required.
Independent financial advisers are not tied to specific insurance companies, which enables them to provide recommendations that are free from any potential conflicts of interest or business relationships that might influence their advice.
The information provided in this blog post is for general informational purposes only. It is advised that you consult with a qualified insurance professional to determine the specific insurance needs of both you and your business.
The information provided in this blog is not exhaustive, and other types of insurance may be necessary depending on your and your business's unique circumstances.
Taxation and insurance laws and regulations can change over time, and it's crucial to stay updated. The Financial Conduct Authority does not regulate tax planning.
