What is business protection insurance and how does it work?

A company’s success relies on the talents and efforts of the individuals behind it. Employers are well aware of this, which is why they use rigorous recruitment methods and pour money into staff retention. But many business owners fail to consider how the business would survive should they lose a staff member suddenly. It’s all very well insuring your buildings and contents, but without the unique skills, insider knowledge and business connections of your team, your firm could take a serious hit.

Business protection insurance is a way for business owners to protect their firm should they or their valued colleagues fall critically ill or pass away. It can provide a cash injection to the company, to help it stay afloat in difficult times. This guide takes you through the ins and outs of business protection insurance, over the following sections:

  • What is business protection insurance?
  • What does business protection insurance cover?
  • Who needs business protection insurance?
  • How much cover do I need?
  • How much does business protection insurance cost?
  • How to find a business protection insurance provider
  • Final thoughts & FAQs.

Table Of Contents (Quick Links)

What is business protection insurance?

Business protection insurance is am umbrella term for multiple insurance products designed to protect a company financially against the loss of one of their owners, key employees or shareholders, whether that’s due to long-term illness, disablement or death. Typically, it offers a cash lump sum to the business to help it remain solvent should it lose one of its key contributors. Companies agree a fixed sum with insurers when they take out a policy, which they can receive as a payout to cover their financial losses upon the death or diagnosis of an insured person.

Losing a vital player unexpectedly can cause significant disruption to daily operations, slow down business processes or even break ties with crucial clients. In the case of a shareholder, it can take time to redistribute company ownership, which can prevent surviving owners from making key decisions that are essential for the company’s recovery. Business protection insurance is designed to ensure business continuity and succession planning following the unexpected loss of a team member. Companies can use the payout to compensate lost sales, train and hire new staff or cover other losses.

What does business protection insurance cover?

Business protection insurance is a package policy which features several key types of business protection insurance. The scope of cover of these policies varies between suppliers but typically covers four key areas.

Key person cover

A company’s success depends on the skills, knowledge and contacts of its employees. If a firm loses one of its major contributors unexpectedly, this can have a profound knock-on effect for business profits. Sometimes known as key employee cover or keyman insurance, key person cover can pay out a lump sum to cover any loss in revenue should the business lose a vital team player. A key person can be any member of staff considered essential for the company’s financial success, such as the CEO, director or business owner.

If you can demonstrate that other staff members are responsible for a significant amount of annual turnover, they can also be included in the policy. Certain companies may rely disproportionately on the expertise of one member of staff. This might be the case for a software company that depends on the chief software designer for any bug fixes and updates to their highest selling product. It may take weeks or even months for a replacement to learn the necessary skills to take over the same role, during which time the company may lose significant revenue.

Common people insured under key person cover include:

  • office managers, crucial for daily operations
  • IT specialists, who single-handedly maintain the company’s sales platform
  • founders, who have essential links with investors
  • sales directors, vital for driving sales and generating profit
  • heads of product development
  • managing directors.

Shareholder and partner cover

This type of cover is designed for companies with more than one business partner or shareholder to ensure a smooth and efficient transition of shares. This can help companies mitigate business interruption, transferring full control to the surviving partners so that they can make appropriate decisions for the future of the business. It’s taken out on the life of the shareholders or business partners and provides a cash lump sum to the surviving owner to enable them to buy back the shareholding of the deceased and retain control of the company.

Business loan protection

In the event that you lose a business partner, it may become necessary to pay back their loans, either owing to a condition of repayment when somebody dies or because they have personal guarantees. Business loan protection typically provides a cash lump sum upon the death of a business owner payable to the surviving shareholders to cover any outstanding business loans or other credit facilities. This type of cover can protect most kinds of business loan, including:

  • commercial loans
  • mortgages
  • director’s loans
  • venture capital loans
  • personal guarantees.

Before you take out this kind of cover, you must establish each person’s liability under the terms of each loan. Owners may be jointly liable or severally liable, or both, for the repayment of a loan, which affects the kind of policy you take out. You can insure anybody responsible for the repayment of a loan, to ensure the survivors can repay the funds in the event of the death of the liable parties.

Life cover for your employees

Some business protection policies include life cover for employees, also known as relevant life cover. This works differently to the three forms of cover above. Instead of compensating the business, this policy can pay a lump sum to the family of a key employee, should they pass away while employed by your company. It’s a tax-efficient way for employers to provide a death-in-service benefit, offering a tax-free sum to the insured’s family or financial dependents.

This enables companies to offer a goodwill gesture to the families of valued employees and can extend peace of mind to staff members, knowing their loved ones have financial protection in their absence.

Critical illness cover

With all of these types of cover, companies typically have the option to choose between life cover and life and critical illness cover. The latter provides added protection, should a shareholder, founder or employee receive a diagnosis for an illness, condition or disability that prevents them from working. Insurers typically give a definitive list of illnesses or conditions for which they agree to pay out following a diagnosis.

Who needs business protection insurance?

Any company could suffer financially following the sudden loss of an owner, shareholder or key member of staff. The loss of a key employee can vastly increase the workload of other colleagues, putting significant strain on the rest of the team. This can result in fewer sales, delays or interruption to daily operations. Losing an employee with specialist technical knowledge can put an entire business on hold if nobody in the company has the skill set to take over their role. This is particularly the case for smaller businesses, whose success may rely disproportionately on several employees.

Similarly, the death of a founder of a younger company may have a more substantial impact, representing the loss of business ideas, leadership and creative direction. It may also leave survivors liable for debts, compounding their financial burden. Smaller, younger companies should carefully consider whether they could absorb these kinds of losses and remain afloat.

That said, even larger companies can depend on the contacts, connections or leadership of a select few. Any company that places significant responsibility on several individuals should consider how they could cope if they were no longer around, particularly without warning. For many businesses, an injection of capital would be the only way a company could survive the loss of integral staff members, to compensate a dip in sales, train and hire new staff or pay outstanding debts. If this is the case for you, a business protection insurance could be a worthy investment to keep your business trading in difficult times.

How much cover do I need?

How much cover you need depends on how many features of cover you add to your policy. You will need to work out how much cover you require for each type of cover you take out under your business protection insurance.

Business loan insurance

Working out the level of cover necessary for your business loan insurance is relatively straightforward, as it depends mainly on the size of the loan. However, you will need to choose between decreasing cover or level cover. Decreasing cover falls in line with an outstanding loan, whereas level cover provides a fixed benefit which remains the same over the term of the policy.

Key person cover

As for key person insurance, the amount of cover you take out will depend on the size of your company and how much it relies on the insured. To do this, many insurers recommend calculating the value of your key individuals to your business, by identifying the portion of the net or gross profits for which they are directly responsible. Typically, enterprises consider an insured sum that is twice the amount of gross profit or five times the amount of net profit that they bring in. Other suppliers recommend an insured sum that is five times the salary of the person in question. If you’re unsure, you can consult a specialist insurance adviser or broker, or use an online key person insurance calculator.

Relevant life cover

Relevant life insurance tends to require the highest limit of cover, as it’s designed to protect the insured person’s financial dependents for the duration of their economic dependency. Limits tend to be calculated based on a multiple of the insured person’s salary.

Insurance providers typically recommend different amounts depending on the age of the insured person. One supplier suggests 25 times the individual’s salary if they are aged 17-39, 20 times their pay if they are aged 40-59 and 15 times their salary for individuals who are 60-69 years old. Many providers can offer limits up to £10 million for relevant life cover.

Share protection cover

Most share protection policies have a specified value of the shares written into the policy, which is the amount the insurer can pay out on the death of the insured shareholder. Share protection is an agreement which all shareholders enter into. How much is covered therefore depends on the value of the shares of each shareholder, and you should check that the cover you take out is sufficient to enable the survivors to purchase the shares of the deceased. Companies may need to review this amount regularly, to ensure the value of the policy grows in line with the value of the business.

How much does business protection insurance cost?

The price of the policy depends on several primary factors. Firstly, it will take into account how much coverage the policy includes, such as whether you have relevant life insurance. Secondly, it will consider the sum insured for each aspect of the policy. Typically, the higher the amount insured, the higher the price of the policy.

Thirdly, as with any insurance, the price of the premiums will reflect the risk to the insurer, with a lower risk offering a lower premium. To ascertain the likelihood of a claim being made, insurance providers will require details of the people insured on the policy, including their age, health and lifestyle. Of course, the younger and healthier the insured persons, the less you are likely to pay. Some insurance providers offer discounts to those who take part in approved health and fitness programmes.

A final consideration is whether you opt for life cover or life and critical illness cover. As critical illness offers a broader scope of cover, this option tends to push up the price of business protection premiums.

How to find a business protection insurance provider

The first thing to look for when choosing an insurance supplier is the level of coverage they can offer. Being underinsured can be just as financially devastating as having no insurance in place if you are unable to keep afloat with the payout. It’s therefore essential to choose an insurer who can accommodate the level of cover your business needs.

Beyond this, it is worth considering what other support and guidance a business protection policy can offer you. Besides the financial burden of losing an intrinsic member of staff is the emotional strain and personal stress it inflicts on the surviving colleagues. Some policies can offer emotional support to team members or strategic advice to the company to ease both the recovery of both the company and its staff. Once you’ve determined what features you want in a policy, there are three routes to finding a business protection insurance provider.

Approaching an insurer directly

An easy way to find business protection insurance is to browse the websites of different insurance providers or enquire directly over the phone. Many insurers offering commercial products can provide business protection insurance, details of which you can typically find on the provider’s website. Here, you can browse the features provided by each policy, as well as the available add-ons that you can integrate into a plan.

Insurers often have insurance experts and advisers available through a helpline, who may be able to offer advice on an appropriate level of cover for your company. If you have any specific requirements, insurers can typically build bespoke coverage to suit your business type and industry, so it’s well worth getting in touch to arrange tailored cover.

Going through a broker

Arranging cover through a broker can offer multiple advantages. Firstly, brokers can provide impartial advice on the range of features that could be beneficial to a business, as well as advise you on a sufficient limit of indemnity. Brokers also tend to have access to a wider portion of the market as many insurers offer deals with lower prices and broader coverage exclusively to brokers. Extensive industry knowledge puts them in a strong position to recommend particular products over others, to ultimately find you a better deal for a lower price.

Going through a broker can also give you the upper hand if any claims disputes arise, as they’re able to liaise with insurance providers with matching industry experience and expertise to facilitate the best possible outcome. If you opt to arrange cover through a broker, you can find one through the British Insurance Brokers’ Association using their online tool. Choosing a broker regulated by BIBA ensures that they adhere to specific industry standards.

Using a comparison site

There are hundreds of insurance providers to choose from, each with multiple products on offer. Comparison sites can be a helpful starting point to seed out companies which can offer you particular features or cater to a specific budget. Many of these sites allow you to filter search results by various criteria, to hone down your search even further, enabling you to find products which directly match your requirements.

Final thoughts & FAQs

Many business owners would agree that their team are their most valuable assets. Particularly in smaller companies, losing somebody in the business can have a devastating financial impact. A handful of employees can be responsible for the majority of the company’s turnover, and if just one of these individuals were to become critically ill or pass away, the business itself might struggle to survive.

Business protection insurance alleviates the financial burden of losing a colleague, enabling surviving business owners to pay off outstanding debts, hire and train new staff, or cover lost profits. This financial security not only helps a company stay afloat but alleviates stress for employees during challenging times.

Do you still have unanswered questions? Find answers to common queries concerning business protection insurance, below.

What are the tax implications of business protection insurance?

The tax treatment for a policy can differ depending on the types of coverage a business protection policy contains. Typically, business loan insurance premiums are not tax-deductible, as the policy exists to protect the surviving business owners rather than the company as a whole. That said, a business loan insurance payout tends to be tax-free, as it’s a benefit for the lender rather than the company.

The treatment of tax for share and partnership protection usually depends on whether the business pays for the premiums, or whether they are paid for by the individual. Tax relief does not tend to be available for share and partnership protection cover.

The most complicated policy concerning tax is key person insurance. Taxation depends on several factors, such as the reasons why the policy has been taken out. Typically, key person insurance premiums are tax-deductible provided that:

  • the sole purpose of the policy is to cover loss of trading income following the loss of the key member of staff
  • the insurance is a term insurance policy.

If the policy is eligible for tax relief, any payout the insurer makes would likely be liable to corporation tax at the usual rate. This may be less tax-efficient than paying tax on the premiums and having the payout treated as capital rather than profit.

The treatment of tax for this kind of policy is complicated and can change under many circumstances. It’s therefore essential to seek advice from a qualified tax adviser, or directly from HMRC.

Is business protection insurance required by law?

Business protection insurance is not a legal requirement. It is an option for businesses who may struggle financially following the incapacity of an employee or shareholder. A study by Legal & General showed that 53% of companies thought they would fold within a year following the death of a key person. Based on this logic, many companies should consider a policy to secure themselves financially. Despite there being no legal grounds for you to take out a plan, it’s worth noting that many banks and investors will not lend funds to businesses without business loan protection in place.

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