Many business owners are unaware of the unforeseen risks to their business, and the step available to help protect their business against these.
Business Protection can be broken down into simply protecting:
* Profits – if a business loses a key employee, a key person plan gives the business a cash injection, helping it to replace lost profits and/or recruit a replacement. –
* Debt – if a business loses a key employee or Director, a policy can help clear any outstanding loans or other business debt.
* Ownership – In the event of the loss of a partner or Director, protection policy proceeds can help the remaining business owners to buy the affected individual’s share of the business.
The death of a business owner who has provided security for a loan is particularly serious for a business. Without a guarantor, the bank may well demand repayment.
According to some research, the average business borrowing is around £350,000. This can take many forms, such as bank loans, overdrafts, personal loans, and credit cards. If someone had used their own home as security to raise borrowings, it would be wise to ensure that this is protected, and that the cover is written in the right way. Otherwise they could well be risking their family home.
The risk can be greater for a sole trader. If a sole trader was to die or become critically ill and was unable to work, then business debts may well become personal debts. They may well be pursued personally for payment by creditors, putting savings or the family home at risk.
Research indicates that around 30% of directors are unaware that a director’s loan has to be repaid on death. The average directors loan is around £225,000, which many businesses may find difficult to raise following the death of a director.
A Relevant Life Plan is a very tax-efficient way of providing life assurance protection, and can work out significantly cheaper than life cover paid for from net income.
This blog first appeared in October 2016 as a feature article for Rawcliffe & Co Chartered Accountants’ Blog. To stay informed with all issues financial & tax related, including key dates and important deadlines head over to Rawcliffe Blog.