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A Guide to Business Protection Insurance and How it Can Help Your Business

You have worked hard to build up your small business from a simple idea to a healthy, thriving enterprise. Still, it takes a lot of hard work and concentration to keep it up and running on a day to day basis. Very often this prevents business owners from looking far into the future and considering how the business might survive without them.

If a business owner becomes incapable of running their business, either through illness or because they have passed away, it can often be difficult for the business to survive without them. Even a thriving business can be rocked by the sudden absence of a key decision maker. Many directors fail to appreciate just how vital a role they play in their business.

Business protection insurance can make the difference between a business surviving a catastrophe and not surviving it. It can also mitigate the financial consequences for others such as family that are dependent on income from a profitable business.

A Guide to Business Protection Insurance and How it Can Help Your Business

Key Person Insurance

Every business, no matter how small, has at least one person who is fundamental to the running of that business. In a larger company there may be several individuals who’s prolonged or permanent absence can drastically affect the ability of the business to operate. Key Person Insurance is designed to compensate for any financial loss that may occur on the death of a key individual, such as a loan in that person’s name having to be repaid.

Even if a company is ultimately unsustainable without that key person, key person insurance can enable a company to close in an orderly manner, providing severance to staff or paying investors rather than simply falling into bankruptcy.

Typically a business will take out the insurance policy on the key person, paying the premiums and becoming the beneficiary of the policy in the case of the key person’s death or incapacitation. Business owners should assume that they fit the role of a key person and that their business is unlikely to survive without them. It is also pertinent to consider other staff that may be difficult to replace in the event of their death and whose absence could be disruptive or damaging to the company.

While key person insurance may keep a company in operation after the passing of a business owner and provide a source of income for their surviving family it should not be seen as a form of life insurance for that business owner. Business owners should seek out personal life cover to ensure their families or dependents are taken care of.

Shareholder Protection

Where a shareholder of a business dies or becomes critically ill, it may be desirable for the remaining shareholders to purchase those shares to ensure they can continue running the business.

Shareholder protection insurance will provide adequate funds in this instance to cover the cost of purchasing these shares. Shareholder insurance is typically used where there are a small number of principal shareholders in a private limited company. There are several reasons why the surviving shareholders may want or need to purchase shares belonging to the deceased party.

One is that share are likely to go the shareholder’s family. They may not be interested in the running of the company and may not be adequately experienced to be involved. Instead they are likely to prefer a cash sum. Due to the circumstances they may not be able to get a fair price on the market for the shares and will have to be taken on as shareholders in the company.

Alternatively a third party, who does not have the company’s best interests at heart such as a competitor, may try to purchase the shares. It could be very damaging to the company should this happen.

Shareholder insurance provides the funds the remaining shareholders require to purchase the outstanding shares. Without that insurance the remaining shareholders may not be able to acquire the short term liquidity necessary to secure these shares.

It can also act as a form of insurance for the family or beneficiaries of the ill or deceased shareholder by ensuring there are funds available to purchase their shares from them at a reasonable price. However, as with key person insurance it should not be seen as a form of life cover for the shareholder and appropriate personal life insurance should be taken.

Corporate Shareholder Protection

Corporate Shareholder Protection is an alternative approach to Shareholder Protection. Rather than provide funds to allow shareholders to purchase shares, Corporate Shareholder Protection allows the company to buy back the shares of the critically ill or deceased shareholder.

Typically, upon being bought back by the company, these shares are cancelled. The sum effect is comparable to the direct purchase of the shares by shareholders as the relative value of the remaining shares increases.

This is generally a more suitable option for larger companies where the distribution of shares amongst shareholders varies. It prevents issues arising over the redistribution of the outstanding shares and effectively maintains the proportions of the remaining shareholders’ shares.

An additional benefit of Corporate Shareholder Protection for larger organisation is that the administrative burden of the policy can be put on the company. However, a potential drawback of a company held policy is that it may not be as well insulated from creditor claims in the event of the business becoming insolvent. The size and scope of a business will be taken into account when weighing up the benefits and drawbacks of one type of policy over the other.

Having invested time, energy, expertise and money in building up a company any business owner should hope to see their business thrive long into the future beyond even their own passing. These are just some of the options any business owner should consider when it comes to ensuring the long term survival of their business.

It can be very difficult to look beyond the here and now, particularly when the day to day running of a business can be so hectic. However, all good business owners know to keep an open mind when it comes to preparing for the future of their business.

Images: ”Insurance policy/Shutterstock.com

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I am a financial advisor with Orca Financial who specialises in providing independent and bespoke financial plans for both companies and individuals to address their current and future financial needs. http://www.orca.ie

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Comments
  • Hi Mairead, Hiring staff is one place where a lot of businesses get it wrong a lot in my opinion, I think a huge part must come down to hiring processes and techniques which at best poor and at worst awful. For instance, the most important person in an interview is the interviewer rather than the interviewee? Usually this hiring mistake is further compounded because the business (usually business owner) then fails to accept and rectify the original hiring failure and persevere with a person who is unable to perform the role. If what I’ve seen is anything to go by, hiring staff is the first place most businesses will make their first critical mistake 🙁

  • Absolutely Niall. I’ve had to interview people both as an employee (because the business owner didn’t want to do it themselves) and when I became self-employed. It can sometimes be easy to see when people are not going to be a good fit, it can sometimes be harder to “get over yourself” and stop your issues blocking you from hiring a very suitable candidate. nnThat is why I think trial periods are great. I’m not a fan of first impressions despite lots of people spouting them to be important, I usually find second and third impressions tend to either totally negate or back up the first one, which to me is a lot more important.

  • Hi Mairead – great post thanks.nnAccountability is my favourite – it exhumes confidence, thoughtfulness, trust, a sense of responsibility, and forward thinking. Staff have a responsibility to have pride and interest in their work, rather than buying into a “blame” culture. They have the power to maintain accountability even if the culture in the business is “blame” – really breaking from the pack!

  • Very true Elaine, we are all accountable for what we do, and accountability is completely different to blame, something a lot of people push together as one thing.nnAccountability has got to be backed up with a clear list of responsibilities though. I’ve often been in jobs where it was assumed you knew what your job was, yet it had never been defined, despite asking. I would regularly be reprimanded for both doing more than my job and not doing enough. That type of confusion unfortunately still takes place today. n

  • Accountability = SelfnBlame = OthersnnJob definition is often hard to come by in smaller organisations. It can be of huge benefit that tasks are assigned to those who can accomplish them brilliantly, rather than having other specified tasks, just because they are part of a standard job spec.nnYou have hit a great taboo there – doing more than expected, a huge debate is possible with that one 🙂

  • Accountability = SelfnBlame = OthersnnJob definition is often hard to come by in smaller organisations. It can be of huge benefit that tasks are assigned to those who can accomplish them brilliantly, rather than having other specified tasks, just because they are part of a standard job spec.nnYou have hit a great taboo there – doing more than expected, a huge debate is possible with that one 🙂

  • Welcome to Tweak Your Biz Sarah and thanks for sharing this business insurance info. It can be a minefield sometimes so thanks for explaining the different types available.




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