Modified on: May 2024

Business Protection – Business Insurance Planning in the UK: Advice From Experts

Business Insurance Planning

What is Business Insurance?

Unexpected loss of key people can severely disrupt operations and endanger any company’s future. Having prudent business protection in place provides a crucial financial safety net in such scenarios.

Business protection insurance comes in various forms to address different loss risks:

  • Shareholder Protection – Covers loss of shareholding directors to enable smooth transfer of their shares to continuing shareholders. Prevents heirs inheriting shares.
  • Partnership Protection – Funds buyout of a deceased or critically ill partner’s share by surviving partners. Avoids disruption to the business.
  • Key Person Insurance – Provides payout to company to cover financial losses when indispensable employees die or have to leave due to terminal/critical illness.
  • Executive Income Protection (Income Protection for Directors) – Replacement income to continue paying directors/executives who cannot work temporarily due to illness/injury. Maintains leadership continuity.


Why is Business Protection Important?

Without adequate protection, a company can spiral into severe financial problems or even insolvency if a key shareholder, director, partner or employee dies or has to leave due to health reasons.

Business protection insurance offers a tax-free lump sum payout to handle such loss. This money can be used to:

  • Purchase shares of departing owners to prevent undesirable transfer of ownership
  • Fund recruitment and training of replacements
  • Repay outstanding business loans that the departed person guaranteed
  • Cover temporary income losses until operations stabilise
  • Pay key creditors and suppliers to maintain goodwill

In short, protection insurance provides liquidity and stability at the most crucial times. It ensures business continuity despite loss of shareholding directors, indispensable partners or key employees.

This article will cover the four main types of protection, why they are important, how to use them and what to consider when setting them up.


What Does A Business Insurance Plan Cover?

Business insurance plans are vital for safeguarding a company’s stability and future, especially in scenarios involving the loss of key individuals or partners. These plans encompass several types of coverages, each addressing specific risks associated with running a business. Here, we provide an overview of four critical components: Shareholder Protection, Partnership Protection, Key Person Insurance, and Executive Income Protection.

Shareholder Protection

Shareholder Protection is essential for companies with multiple shareholders, typically structured as private limited companies. This insurance plays a crucial role in succession planning by ensuring a smooth transition of shares if a shareholding director dies or suffers from a critical illness. The insurance payout facilitates the purchase of the deceased or incapacitated shareholder’s shares by the remaining shareholders. This avoids complications such as shares passing to heirs who might not be interested in the business. The arrangements can vary, with policies being either ‘own life plans’ written in trust or ‘company share purchase’ plans, each with its unique tax and legal implications.

Partnership Protection

Partnership Protection is designed for businesses operated as partnerships. It provides financial means for the surviving partners to buy out the interests of a deceased or critically ill partner. Similar to Shareholder Protection, it helps maintain business continuity and prevents disruption from unplanned ownership changes. The policy pays out a pre-agreed sum that is used to purchase the departing partner’s share, ensuring that the business remains in the hands of the existing partners and operational stability is maintained.

Key Person Insurance

Also known as Key Man Insurance, this policy is designed to compensate a business for the financial losses that would arise from the death or extended incapacity of an important member of the business. These key individuals are those whose skills, knowledge, experience, or leadership are invaluable to the company’s operations and profitability. The insurance payout can cover costs such as hiring a replacement, lost sales, and other expenses incurred while the business adjusts to the change. Key Person Insurance is a critical component for any business that relies heavily on a few key individuals.

Executive Income Protection

Executive Income Protection (Director’s Income Protection) is tailored to safeguard against the loss of high-earning executives due to illness or injury. It ensures that the company can continue to pay the executive’s salary during their absence. This type of insurance is pivotal in maintaining financial stability and operational continuity, especially in smaller businesses where the loss of a top executive can have significant repercussions. The policy provides a monthly payout, typically covering a substantial portion of the executive’s salary, and continues until the executive can return to work or reaches retirement.

In conclusion, a comprehensive business insurance plan, covering these four key areas, is integral to the resilience and longevity of any business.


Business Insurance Advice From Financial Experts

Navigating the complexities of business insurance can be challenging, especially when it comes to specialised areas like shareholder protection, partnership protection, key person insurance, and executive income protection. Each of these insurance types plays a crucial role in safeguarding the stability and continuity of a business.

Shareholder Protection

Shareholder protection, also known as buy-sell insurance, is a crucial component of succession planning for private limited companies. It pays out a tax-free lump sum on the death or diagnosis of a critical illness of a shareholding director. This allows the remaining shareholders to buy the individual’s shares in the company.

There are two main methods of arranging shareholder protection – own life plans written in trust or company share purchase plans. Each has pros and cons from legal, tax and flexibility perspectives.

Own Life Plans in Trust

Here, each shareholder takes out a personal life insurance policy on their own life, which is written in trust for the benefit of the other shareholders from outset.

The shareholders pay the premiums personally, either from income or by borrowing from the company tax efficiently. As the plan owner, they can get critical illness and terminal illness benefits too if required.

On death of a shareholder, the policy proceeds are paid to the trustees tax-free and used by the continuing shareholders to buy the deceased’s shares at a previously agreed price. The deceased’s heirs do not inherit the shares.

If a shareholder departs, they can take the policy with them. The trust provides flexibility to adapt to changing circumstances.

Company Share Purchase

In this method, the company takes out policies on the lives of each shareholder and pays the premiums. The company is the plan owner and policy proceeds are tax-free capital receipts.

This avoids income tax charges for shareholders. However, companies may not get corporation tax relief on premiums.

When a shareholder dies, the tax-free payout allows the company to purchase the deceased’s shares. Rules under the Companies Act around distributable reserves must be checked.

A key aspect is that the purchase of own shares by a company causes the shares to be canceled. This reduces the total number of shares issued by the company.

Overall both approaches have pros and cons. Our experts can advise which method best suits your situation. The key is ensuring a tax-efficient share transfer mechanism exists to secure your company’s future.


Partnership Protection

Like shareholder protection, partnership protection is essential for securing small partnerships against the death or critical illness of a partner. It provides funds for the continuing partners to buy out the departed partner’s share.

Arranging Partnership Protection

Partnership protection involves each partner taking out an own life policy, written under trust for the benefit of the other partners. The partners pay the premiums personally.

Alternatively, the partnership can take out policies on each partner’s life and fund the premiums. However, this may not be tax efficient as the payout is treated as trading income, unless paying out capital.

Valuing the Departing Partner’s Share

The value of each partner’s share in the partnership is specified under a partnership agreement. This includes the payout amount from the partnership protection policy on death/illness of a partner.

What Happens When a Partner Dies

If a partner dies, the tax-free policy proceeds are paid to the continuing partners. They use this capital to purchase the deceased partner’s share at the previously agreed price.

If a partner leaves due to critical illness, the payout again allows the remaining partners to buy out the leaver’s share. The leaver may also receive terminal or critical illness benefits from their own policy.

Partnership Continuity

The key benefit of partnership protection is that it provides liquidity to buy a departing partner’s share without diluting equity. The partnership can continue seamlessly without bringing in the heir as a new partner.

The share value must be reviewed periodically and policies amended to provide adequate cover. The value should be based on fair market value, not just capital contributed.

Tax Treatment

For taxation purposes, the purchase of a partner’s share is usually treated as a capital transaction. The continuing partners acquire the leaver’s share in return for capital rather than revenue.

Therefore, the payout does not get added to partnership income and taxed. It also means the remaining partners inherit the cost base of the departing partner, ensuring protection against capital gains.

Aligning the Agreement and Policies

The key is ensuring your partnership agreement and insurance policies align seamlessly so that the business continues uninterrupted in case a partner exits. This safeguards the equity and livelihoods of all stakeholders.

Partnership protection provides flexibility to adapt to departures compared to permanent buy-sell agreements funded via capital. Our experts can help design optimal partnership insurance tailored to your specific situation.


Key Person Insurance (aka Key Man Cover)

Losing an employee who is crucial to your company’s success can significantly impact operations, revenues and profitability. Key person insurance provides vital financial protection in such scenarios.

What is Key Person Insurance?

Key person insurance covers the financial losses a business would suffer if a key employee dies or is diagnosed with a terminal or critical illness.

The tax-free lump sum payout can be used to:

  • Recruit and train a replacement for the key person
  • Repay outstanding business loans that the key employee may have guaranteed
  • Support cash flow till operations stabilise after the disruption
  • Cover loss of profits during the transition period
  • Pay off key business creditors that may demand payment if the key person passes away

It helps ensure business continuity when the skills, relationships and expertise of the key person are suddenly no longer available.

Identifying Vital Key Persons

Key employees may be crucial for various reasons – specialised skills, knowledge, leadership, customer relationships, sales ability, technical expertise, etc.

Assessing the impact of losing the person can help identify roles that are indispensable. Some factors to consider:

  • Revenue declines or losses expected from losing the key person
  • Time and cost to find a suitable replacement
  • Business valuation impact if the key person departs
  • Loan guarantees, client contracts or partnerships that depend on the individual

Ideal Insured Amount

The payout amount should cover the financial loss incurred during the disruption period after losing the key person.

Project the business impact over the next 1-2 years. Estimate costs related to hiring, temporary staffing, operational losses, revenue declines, creditor payments etc. This indicates the ideal coverage.

The payout helps handle the turmoil and prevents severe financial strains. Our experts can help determine optimal cover amounts.

Policy Ownership and Premiums

The company takes out the policy on the key person’s life and pays the premiums. As the owner, it receives payouts tax-free.

The premium is typically not a deductible business expense. However, the financial protection provided is worth the cost.

Key person insurance is indispensable for small companies to survive the loss of star employees. Contact us to safeguard your business and ensure financial stability. Our experts can craft optimal policies tailored to your specific needs.


Executive Income Protection

High-earning directors and executives are often indispensable for company performance and growth. Losing them temporarily due to illness or injury can significantly disrupt operations and hurt profits.

Executive income protection provides a crucial safety net to continue paying top executives in such situations. This maintains leadership stability during turbulent times.

How It Works

Under such policies, the company takes out coverage on key executives and pays the premiums. If the executive becomes unable to work due to health reasons, monthly payouts equivalent to 75% of salary are made to the company.

These tax-free payouts allow the business to keep paying the executive’s full salary during the absence. Once the leader recuperates and returns to work, the payouts stop.

Key Policy Features

Executive income protection has a waiting period before payouts begin, typically 3-6 months after disability starts. This prevents claims for minor illnesses. Payouts then continue until retirement age or return to work, whichever is earlier.

Ideal policies have features like premium guarantees, waiver of premium during the claim, automatic indexation of benefits to offset inflation, and a sufficiently long payout period.

The Benefits

The key benefit is uninterrupted salaries for leaders, even when illness disrupts their work. This maintains normalcy despite the absence of crucial decision-makers and rainmakers.

For the executive, there are no tax implications. They continue receiving their usual salary before and after illness.

Tax Considerations

The company pays this from policy payouts during disability. Premiums are generally not tax-deductible for the company. But the financial security and stability provided is worth the investment.


Finding the Best Insurance For Your Business

Selecting the ideal insurance plan so your business has income protection, particularly in areas like shareholder protection, partnership protection, key person insurance, and executive income protection, requires careful consideration and expert guidance. As an independent financial adviser, we offer tailored advice to help you navigate this crucial decision-making process. Here’s a structured approach to finding the best insurance for your business needs.

Conduct a Detailed Risk Assessment

Begin by thoroughly assessing the specific risks your business faces. This involves evaluating the roles of key shareholders, partners, and personnel, and understanding how their potential loss could impact your business operations and continuity. Consider factors such as the size of your business, the nature of your industry, and the roles of each individual in the business’s success. An independent financial adviser can assist in this risk assessment by providing an objective analysis of your business’s unique vulnerabilities.

Understand Each Insurance Type

Gain a comprehensive understanding of the various insurance types:

  • Shareholder Protection: Safeguards your business against the loss of a shareholding director by enabling the remaining shareholders to purchase the departed shareholder’s interests.
  • Partnership Protection: Ensures the smooth transition of a partner’s share to the remaining partners in the event of death or critical illness.
  • Key Person Insurance: Provides financial compensation to your business for the loss of a key employee whose absence could significantly impact business operations.
  • Executive Income Protection (Income Protection for Directors): Offers income replacement for high-earning executives or directors during periods of illness or injury, ensuring financial and operational stability.

Seek Independent Financial Advice

As an independent financial adviser, our role is to provide unbiased advice tailored to your business needs to help provide protection for your business income. We can guide you through each type of insurance, explaining the benefits, limitations, and suitability for your specific business context. Our expertise lies in understanding the nuances of these insurance types and how they align with different business models and structures.

Compare and Analyse Policies

Not all insurance policies are created equal. It’s crucial to compare various policy options from different insurers. Look beyond just the premiums; consider aspects like coverage limits, exclusions, and the claims process. An independent adviser can provide comparative analyses of different policies, helping you to discern which offers the best coverage for your business at the most reasonable cost.

Consider the Long-Term Implications

Choose insurance that not only addresses your current needs but also aligns with your long-term business goals and succession plans. This is particularly important for shareholder and partnership protection, where the future structure of your business is at stake. An independent financial adviser can help forecast how these policies will play out in various scenarios, ensuring that your choice supports your long-term business strategy.

Regular Reviews and Updates

Finally, regular reviews of your insurance coverage are essential. As your business evolves, so too should your insurance. An independent financial adviser will work with you to reassess your insurance needs periodically, ensuring that your coverage remains relevant and comprehensive.

In conclusion, finding the best insurance for your business is a process that demands careful analysis, foresight, and professional guidance. With the expertise of an independent financial adviser, you can make informed decisions, ensuring that your business is protected against unforeseen circumstances, now and in the future.


Our Expertise in Business Insurance Planning

As a leading financial planning expert, Frazer James helps secure businesses through bespoke partnership and shareholder protection plans.

We have decades of experience in this area and work with many small partnerships and private limited companies. Our tailored solutions prevent the need to dissolve businesses or bring in unsuitable new owners in case of a partner or director’s death/illness-triggered exit.

Schedule an initial discussion with us to evaluate your specific risks. We will assess your partnership agreement, articles of association, shareholder agreements, etc. Our individually crafted policies help ensure:

  • Smooth transfer of shares from exiting owners to continuing shareholders
  • Liquidity for the families of deceased/ill partners or directors
  • Uninterrupted business continuity
  • No equity dilution

Don’t leave your business finances to chance in case of a partner, director, or employee’s untimely exit. Get in touch with the experts at Frazer James to craft tailored protection covers.

Schedule an initial consultation with us for advice on:

  • Shareholder protection to enable smooth ownership transfer
  • Partnership insurance to allow buying out leavers’ stakes
  • Key person covers to financially protect against losing star employees
  • Executive income protection to safeguard leadership continuity

With years of experience advising businesses across different sectors, Frazer James offers a safe pair of hands to protect your business and provide stability during uncertain times.

Choose Frazer James for robust business protection and lasting stability.


Frequently Asked Questions About Business Insurance in the UK

When it comes to business insurance, particularly in the areas of shareholder protection, partnership protection, key person insurance, and executive income protection, many questions arise. Below are some of the most frequently asked questions related to these services in the UK:


1. What exactly does shareholder protection insurance cover in the UK?

Shareholder protection insurance is designed to provide a financial payout if a shareholding director passes away or is diagnosed with a critical illness. This payout allows the remaining shareholders to buy the deceased or critically ill director’s shares, ensuring business continuity and preventing shares from falling into potentially unwanted hands.


2. How is the value of a partner’s share determined in partnership protection insurance?

In partnership protection, the value of each partner’s share is typically outlined in the partnership agreement. This agreement specifies how much the insurance policy will pay out in the event of a partner’s death or critical illness, ensuring the remaining partners can buy out the departing partner’s interest at a fair, pre-agreed value.


3. What are the key benefits of having key person insurance for a business?

Key person insurance is vital for mitigating the financial impact that the loss of a crucial employee could have on a business. The benefits include covering the costs of recruiting and training a replacement, compensating for lost business or profits, and covering any outstanding financial commitments that were reliant on the key person.


4. Is executive income protection a necessity for all types of businesses?

Executive income protection is particularly important for businesses where the temporary loss of a high-earning executive due to illness or injury could significantly impact operations or financial stability. It ensures that the business can continue to pay their salary, maintaining stability during their absence. While it’s more critical in some businesses than others, it’s generally a wise precaution for any business that relies heavily on its executive team.


5. How frequently should a business review its insurance policies in the UK?

Business insurance needs can change over time due to business growth, changes in the business environment, or new legislation. It’s advisable to review policies at least annually or whenever significant changes occur within the business, such as expansion, acquiring new assets, or changes in ownership structure.


6. Can a business change its insurance provider if it finds a better offer?

Yes, a business can switch its insurance provider if it finds more suitable coverage or better rates elsewhere. However, it’s important to carefully assess any new policy to ensure it provides adequate coverage and aligns with the business’s specific needs. Consulting with an independent financial adviser before making a switch is advisable.


7. Are there tax implications for these types of business insurances in the UK?

The tax treatment of business insurance can vary. For example, premiums for key person insurance are not typically tax-deductible, while the payout is usually tax-free. The specifics can depend on how the policy is structured and the intended use of the insurance proceeds. It’s essential to consult with a financial adviser or tax specialist to understand the tax implications for your particular business and insurance type.


These FAQs provide a basic understanding, but it’s crucial to seek tailored advice from an independent financial adviser to ensure that your business insurance coverage aligns with your specific needs and circumstances in the UK.



Financial Advisor Bristol and Pension Advisor Clifton

Frazer James Financial Advisers is an Independent Financial Advisor Bristol.

About us: Frazer James Financial Advisers is a financial advisor based in Clifton, Bristol. As an independent financial adviser, we’re able to provide independent and unbiased financial advice. We provide independent financial advice, retirement planning advice, investment advice, inheritance tax planning and insurance advice.

If you would like to talk to a Financial Adviser, we offer an Initial Consultation without cost or commitment. Meetings are held either at our offices, by video or by telephone. Our telephone number is 0117 990 2602.

Frazer James Financial Advisers is located at Square Works, 17 – 18 Berkeley Square, Bristol, BS8 1HB.

This article provides information about investing but not personal advice. If you’re not sure which investments are right for you, please request advice. Remember that investments can go up and down in value, you may get back less than you put in.

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