Sophie is the new landlady of a pub with her husband, Andrew, in the heart of Surrey. They employ around 10 full-time staff. She is looking for suitable business protection as the current one is due for renewal later in the summer. Sophie is looking for key man cover for herself and Andrew, but also for the manager as he has specific knowledge about running the pub. If Sophie or Andrew die, they would like to ensure the continuity of the business. What do you recommend?
Iain Henshall, Towry LawKeyperson cover is intended to protect a business from the loss of a key contributor to the business. This need is likely to be greatest for smaller businesses, which are heavily dependent on the expertise and experience of a smaller number of people.
The amount of cover required should reflect the needs of the business, as the insurer will check this as part of the underwriting requirements. When determining the cover required, the following formula is often used: keyperson's remuneration/total payroll x profit x years for the business to recover. Sophie may, however, simply consider a multiple of salary.
It may be possible to improve the existing keyperson terms and Sophie could also look at adding keyperson critical illness or income protection. The latter would provide regular income payments into the business.
Their tax relief position should be confirmed with their inspector of taxes. It should not be assumed that it will be automatically granted.
The business receiving a lump-sum payment may increase the business value; consideration should be given to the impact on any shareholder protection cover. Rewriting the keyperson cover as own life policies in trust is an alternative option.
They also need to check they have suitable double option (cross option) agreements in place in order to preserve business property relief for Inheritance Tax mitigation. They could also consider their personal cover requirement and that of their employees.Ian Brown, SkandiaBusiness protection for small businesses such as this is essential because the loss of a key person is likely to have a significant effect on its future. The question in a small operation is how much profit would be lost if an individual disappeared tomorrow?
Insuring against a critical illness as well as death is a wise precaution, as the financial effects of a serious illness can be just as catastrophic for the business. The business should write individual cover on Sophie and Andrew on a 10-year rolling-term basis to pay out on death or earlier critical illness.
This would give them the stability of a guaranteed premium for 10 years, with the option of renewing the cover at the 10th year without the need for further underwriting. An inflation option or key man guaranteed increase option can be included in case there is a need to increase the cover at any time. Following an increase, the new premium would be guaranteed for a further 10 years or until the next increase happens.
As an employee, it is more likely that the manager will move on at some point in the near future. A shorter fixed term, of say five years, would be more suitable in this instance.
To cut down on paperwork and admin for Sophie and Andrew, using Skandia Protect would enable all three polices to be contained in a single plan, despite the variation of terms, and could be applied for on a single application form. Further policies could be added or removed in the future, depending on the circumstances of the business. Rod McKie, Aegon Scottish Equitable, Individual ProtectionWhile the pub trade is fortunate there is a healthy amount of experienced staff available, it would be essential to understand what specific specialist knowledge the manager has that would be difficult to replace. This would help to determine whether or not a replacement could be recruited without a significant impact on the business, or whether business interruption insurance should be considered.
As it is unlikely Sophie and Andrew will receive sick pay, and because their salaries will be required to pay a replacement, to ensure business continuity, Sophie and Andrew should consider taking out income protection (IP) on a personal basis. This would ensure that, in the event of either of them being unable to work due to accident or sickness, they will continue to receive an income. They could also put similar cover in place for the manager.
If Sophie and Andrew have taken out any sort of mortgage or business loan in order to purchase the premises, they may also want to put life or life with critical illness (CI) protection in place to ensure the loan is covered in the event of the death or CI of either of them. Partnership or shareholder protection would not be appropriate here as they are married and the shareholding would pass to the other if one of them should die.
IP based on a 34-year-old non-smoker, tax-free monthly benefit of £1,000, activities of daily work definition of disability, and 13-week deferred period would cost £76.95 a month for Sophie and £51.51 a month for Andrew.
Sophie and Andrew should take into consideration any sick pay arrangements, and savings when deciding on the deferred period.
