Business protection

Assure your stakeholders with business protection

One of the key vulnerabilities with many businesses is the protection arrangements between the directors that own the company. A business protection plan could save the organisation in the event of a director tragedy.

Many of our clients are business owners themselves. Often we find that the protection arrangements between the directors who own the business are woefully short – if not non-existent.

One major area of concern is what could happen to the business if one of the directors should die.

If there is no correctly tailored life insurance arranged between them, then they could find the surviving directors lose their control of their business. Clearly this is not what each would want – never mind the emotional turmoil of enduring the death of their friend and business partner.

But from a business point of view it can only be sensible to put arrangements in place correctly to ensure the control of the day to day decisions of the company. The same is exactly true in the event of a director of the business were to be diagnosed with a Critical Illness.

Apart from having to deal with the difficulties and emotional problems this would ultimately bring, the business must be responsible to itself and correctly arranged insurance for this would act like a lifeboat during a very stormy period.

Other aspects of protecting the business is for long term incapacity of a ‘key person’ within the company. This doesn’t necessarily have to be a director or shareholder, this could be a member of the team who you rely on to bring in a significant share of the turnover/profits of the business and who you would need to ultimately replace to keep the business going smoothly.

To replace a key member of staff if they fell sick and couldn’t work could cost a great deal of money, particularly if a replacement were needed quickly to avoid any long-term negative impact on the turnover and profits of the company itself.

Relevant Life

For many of our clients who own their own limited companies there exists a very tax efficient way to set up life cover as a ‘death in service’ scheme so their loved ones are protected by a life assurance policy owned by their company.

This is an HMRC approved scheme which a number of insurance providers subscribe to, which enables the directors of the limited company to put in place a life assurance policy – owned by their company and the premiums paid for by their company.

In doing so HMRC have approved that there is no further ‘benefit in kind’ because the company is paying the premiums. Unlike other benefits which the company may pay for, Relevant life avoids the tax treatment of a more traditional benefit in kind where the tax man treats the policy premiums as an additional income.

For these individuals, it enables the business to cover the cost of the premiums without causing any further tax liability, and the cost of the premiums to the business can be treated as a business expense.

Case study 1:

We were approached by three directors of a limited company, (recruitment business) in London SE1.

Assisted all three with their mortgage requirements and through further discussions, they wanted to review their life cover arrangements.

They had made no existing provision.

Coreco recommended a Relevant Life Policy (individually) for all 3 directors and for varying amounts of cover.

The company is the ‘plan owner’ of each policy and all plans are written into trust from the outset.

The company pays the premiums for all three plans NOT the individual director.

The company pays the premium annually in this case (can be monthly if preferred).

The company benefits from the taxation advantages under HMRC’s legislation on Relevant Life, and does not fall into any ‘Benefits in Kind’ treatment.

Case Study 2:

Our clients, a husband and wife are owners of a Limited company (Architects).

Mr A does all the architectural work, whilst his wife looks after the books until accounts need auditing each year.

Mr A wanted to take out some life cover for his family in the event he should die.

Coreco discussed the advantages for him and his business using a Relevant Life Policy rather than a standard plan.

Premium was rated due to medical history but still went ahead as his company cover the premium costs anyway (not him personally).

Premiums are NOT paid by the client personally and in this case the company pays these annually. Again the plan is written into trust from the outset.

Like in case study 1 the taxation advantages for the company are worth having and again avoids the ‘Benefits in Kind’ trap.

In short, clients get their life cover, they don’t have to pay the premiums out of their own personal incomes, and the business benefits from the tax advantages approved by HMRC.

For more details please contact David Tinsley on 020 7220 5100 or click here for more contact options.

For insurance business we offer products from a choice of insurers.

Frequently asked questions

What happens if I stop paying the premiums?

This depends upon the type of policy you have. Unless you have an endowment policy or ‘whole of life’ assurance, which contain an investment element, you are unlikely to receive a return from any premiums you have paid. Even with endowments or whole of life plans you may not get back all the money paid into the policy.

In most cases, if you stop paying the premiums to your policy, then after a certain amount of time your life assurance cover will cease to be provided, i.e. your policy cover will lapse.

If, at a time in the future, you wished to reinstate the policy then fresh medical evidence would normally be required by the life assurance company before new cover could be offered.

When should I review my life cover?

It’s vital to review your life cover on a regular basis, but certainly when there are major changes to your life, such as the birth of a child, a marriage, a new job or home.

Why do I have to provide details about my health?

The life assurance company must decide if you are an acceptable risk. If you, or any members of your family, have a history of illness, they will want to check on your general state of health before deciding what premiums to charge for the insurance cover you require.

In most cases, life assurance companies are able to offer terms without the need for you to undergo a medical, although they do have the right to request an examination if they feel it is necessary.

However, just because they request a medical does not necessarily mean they are going to charge you higher premiums.

Can I have a policy that covers my partner and myself?

Yes. These are known as ‘joint life’ policies, and they pay out if either of you should die during the lifetime of the policy. If the second person is not your spouse then you will need to prove that their death would cause you a ‘financial loss’.

What should I think about when selecting a life assurance policy?

Your first consideration should be the level of insurance cover required. Ask yourself questions such as: how much money do I need to pay off all my debts? How much money do my dependents require to live the same lifestyle that they currently enjoy?

Once you have decided on the level of cover, you then must decide on the type of insurance required. Do you want a policy that pays out a lump sum or one that provides a regular income? Do you want to pay a little more and use your policy as a savings plan? Do you even want a plan that pays out irrespective of whether you die during the lifetime of the policy?

Once this has been established, you are in a position to compare the premiums required by the various life assurance companies. However, you should always read the terms of the policy to check any restrictions or exclusions contained within it, such as death caused by undertaking a hazardous pursuit.

Can I have a policy where the lump sum changes to meet my needs?

Yes. A large number of life policies are ‘term assurance’ policies, of which there are many different kinds. These are:

  1. Level term assurance: the premiums you pay and the amount of cover you have remain constant throughout the term of the policy.
  2. Decreasing term assurance: the amount of cover decreases over the term of the policy, although you continue to pay the same premiums. This type of policy could be used to pay off a debt that decreases over a period of time, for example, a repayment mortgage. It could also be used to cover a potential inheritance tax liability.
  3. Renewable term assurance: life assurance that pays out if you die within the period of protection, but which gives you the option to renew the cover at the end of the term without having to provide evidence of health (as long as you are not older than a certain age, e.g. 65). Although the premiums are likely to be higher, the life office will not be able to refuse you the new insurance.
How much does life assurance cost?

The premiums for life assurance policies vary according to your personal circumstances, for example, age, medical history and your goals (see below)

Your choice of life assurance company can also affect premium levels: some will naturally be more competitive than others. Speak to an experienced financial adviser to ensure you are getting the best rate.

Everything you need to know to speed up your mortgage application.
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