Small business is big business in the UK. In fact, according to 2022 government figures, the UK is home to 5.47 million small businesses that have fewer than 50 employees. Together, they make up 99.2% of the total UK business population.

But while many of these businesses are successful at dealing with everyday challenges, such as how to stand out from their competitors, finding and retaining customers and staying profitable, many business owners are unaware of how ‘business protection’ could help them avoid an unexpected crisis.

Chris says that, in his experience, it’s all too easy for small business owners to overlook the need to arrange business protection – even when they already have personal protection policies in place. There are several reasons why this might be the case.

“Business owners might underestimate the need for separate business protection – or aren’t fully aware of the specific risks their business faces,” explains Chris. “Many mistakenly believe their personal insurance policies automatically cover their business activities. However, most personal policies have exclusions for business-related claims.”

Chris continues: “A lot of small businesses operate on tight budgets, so business protection policies can be perceived as an additional, or even unnecessary, expense. They focus first on insurance for their business premises, vehicles or essential operating machinery and equipment before they even begin to consider insuring themselves!”

But Chris wants to ensure that small business owners realise that they are often the most important – and expensive – business asset, along with the other key employees of the business. And while business protection provides financial support in the event of the death of the business owner or other shareholders, it can also apply in cases where they are diagnosed with a critical illness or disability.

Broadly speaking, there are three types of protection policies that small business owners should consider. The first, and arguably most important, is shareholder protection.

Shareholder protection provides insurance for small businesses if a shareholder or business partner dies, or suffers a disability or critical illness. The intention is to make sure that if any of those three events occurs, the business will not be significantly affected. The remaining shareholders’ or partners’ interest in the company will be protected.

“Think of it this way,” explains Chris. “In the event that a partner in the business dies unexpectedly, there’s the possibility that the partner’s shares will be inherited by their family, who may decide to sell them – perhaps to a third party or someone not previously involved with the company.

“This could make life difficult for the other shareholders or even result in the sale of the business. So, to avoid this, shareholder protection prevents potential disputes, disruptions, or the need for forced sales that could impact the business’s operations and long-term viability.”

– How does shareholder protection work?

Shareholder protection usually involves the purchase of life insurance or critical illness insurance policies on the lives of the individual shareholders or partners. These policies are often written in trust, with the remaining shareholders or partners named as the beneficiaries.

In the event of a claim – for example, when a shareholder has died – the proceeds from the shareholder protection policies can then be used by the remaining shareholders or partners in the business to buy those shares. The proceeds pay the shareholder’s family, without it costing the business or forcing it to rely on external sources of funding.

Chris elaborates further: “This arrangement helps to ensure the smooth transition of ownership and provides financial security to the remaining shareholders or partners, as well as providing the inheritors of the shares with fair compensation.

“Arguably the best part of shareholder protection is that everything can be arranged in advance so that all parties know the value of the shares and what will happen to them should the policy ever be paid out. In other words, no nasty surprises that threaten the future of the business.”

The second-most important business protection to consider is key person protection. This insurance is designed to ensure a small business can continue operating in the event of the loss or incapacity of a key individual due to death, disability, or critical illness.

A key person could be someone whose contributions are crucial to the success and profitability of the business, such as the owner, founder, or a key employee with specialist skills or knowledge.

“Key person protection is valuable for businesses of all sizes,” Chris says, “but is particularly critical for small businesses where the loss of a key individual can have a significant impact on operations, revenue, and long-term sustainability.”

– How does key person protection work?

Key person protection typically involves arranging a life insurance, disability insurance, or critical illness insurance policy on the key person’s life. The policyholder is the business, so it pays the premiums, and the business is the beneficiary in the event of a claim being paid.

The proceeds from the policy can be used by the business to cover various expenses and financial obligations. These might include covering temporary staffing costs, recruiting and training a replacement, repaying debts or loans, offsetting lost revenue or profits, or even assisting with business restructuring.

Relevant life cover is a type of life insurance, specifically designed for small business owners to provide insurance for themselves – or their employees. It offers a tax-efficient way to provide a cash payout (the same as most employees in larger companies are entitled to) if the insured person dies during the policy term, helping to ensure the financial security of individuals and their families.

– How does key relevant life cover work?

One of the key benefits of relevant life cover is its tax efficiency. Premiums paid by the business are generally tax-deductible as a business expense. The death benefit paid out to the beneficiary is typically free from income tax and inheritance tax as well, subject to certain conditions.

The small business typically owns the life insurance policy and pays the insurance premiums. The insured person chooses who will receive the death benefit payout in the event of their death, and the beneficiary can be either an individual or a trust. The amount insured is usually based on a multiple of the insured person’s salary, allowing small business owners to provide an appropriate level of financial protection.

“No one can predict the future,” says Chris, “but you can make sure that you are protected if something unexpected happens. When it comes to taking out business protection policies, the key question to ask yourself is this: as a business owner, can you afford not to take steps to protect your business in case the worst happens?

“The good news is that just like with personal insurance policies, there are many options to choose from. Together with your financial planner, you can find the insurance that suits you and your business.”

To arrange an appointment with Chris, or an Amber River financial planner in your area, call 0800 915 0000. Alternatively, use our contact form here.