Protecting a business against serious illness

Businesses often protect their premises, stock and vehicles, but what about their people? The loss of someone who is vital to a company’s operations can be hugely detrimental to the profitability or even survivability of a business.

The death of a business owner can be devastating for a company and the family, especially when the life is uninsured from a business and personal perspective. But it is just as important to safeguard against critical illness.

Statistically, people are far more likely to suffer a critical illness than die during their working lives – this is more pronounced for business owners and more still for male business owners. Data shows that a 40-year-old male business owner has a 41% chance of getting a critical illness before the age of 65 compared to an 18% of dying.

Having protection that covers both life and critical illness ensures the business can claim in either event. The cover can provide a safety net at a time when the financial stability of the business is crucial – and potentially in jeopardy.

The death or critical illness of a business owner often sees credit lines dry up. Banks may quickly pull lending facilities. Any director’s loans to the company are immediately repayable on death.

Critical illness cover can negate the de-stabilising effect of the serious illness of a key person or shareholder and allow the business control and continuity at a difficult time, particularly for small and medium-sized companies.

The loss of a key person can put a strain on both business and personal relationships. People often experience difficulties returning to work and can be off for extended periods of time. On the flip side, modern medicine means someone can have a heart attack and return to work within six or eight weeks. A critical illness pay out gives the flexibility for the individual and others in the business to make the right choices for everyone’s benefit.

Comprehensive business protection de-risks a business and helps to ensure it can continue to operate. It often brings the bonus of a tax benefit, too.

Broadly speaking, a business can insure the life and critical illness of both key people and shareholders.

Key person cover

Who is the key person or key people within a firm? In many cases, this will be the business owner or owners but not always. It may be the top salesperson or a highly trained engineer who keeps the production line going.

Key person life and critical illness cover provides a business with the financial firepower to recover from the death or critical illness of a key person. The proceeds may be used to repay debt, replace lost profits or find a successor – meeting the costs of recruitment, a ‘golden hello’ or training, for example.

Shareholder cover

All prudent businesses should have a plan in place to determine what would happen if a shareholder died or suffered a critical illness. The surviving shareholders usually acquire the right to buy the shares but what happens if they lack the financial means to do so? The shareholding may be acquired by a third party.

In a real-life example, coffee chain AMT faces bankruptcy following the death of one of three brothers, all equal shareholders, at the age of 45. His widow wants to be bought out of the company and took the case to the High Court, which ruled in her favour.

For limited companies or partnerships, life and critical illness cover can be taken out for each of a company’s shareholders or partners up to the value of their share in the business, providing a valuable safeguard against such a situation.

Jude Reynolds is a business development manager at Zurich Intermediary.

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