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Can you afford to risk it?

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All businesses have risks that need to be managed.

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Businesses will have a multitude of insured risks — whether that be insurance for physical assets, liability insurance or one of the many types of cover available in the financial markets.

However, one of the most important assets in any organisation is often overlooked for insurance purposes: it’s people.

Without these people in the business, it would be very difficult or often impossible to continue trading — it is therefore vital that businesses cover this risk by effecting appropriate insurance cover for a number of different types of risk.

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Key Person Protection

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Successful businesses rely heavily on their greatest asset: their people. Without it’s people, an organisation cannot function successfully.

Where a business relies heavily on one, or a small number, of key employees to add value to the business, there may be severe financial consequences should one of those key people die or be unable to work as a result of illness.

Key Person Protection helps to mitigate these risks by paying out a lump sum benefit or a monthly amount, depending on the policy type chosen, to the business to replace the profit the key person would have generated, or to help cover the costs of hiring a replacement employee.

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Tax relief can be given on the premiums where;

  • The life insured is an employee with a share of less than 5%

  • The insurance is intended to protect profit (not debt)

  • The policy term is appropriate for the tenure of the key person being covered

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Taxation of the proceeds of the cover can be treated as usual business profits or trading receipts by HMRC, subject to the local tax inspectors decision.

It can be difficult to quantify the financial value of the contribution of a key employee.

As a result, there are a number of accepted methods of calculating the benefits for the policy; it could be on the actual impact to the business, a multiple of salary basis, a loss of profit basis or a proportion of payroll.

It is also important to discuss the legal structure of the business and how this interacts with this cover.

PIB Employee Benefits work with employers to establish the most efficient way of protecting their key employers with this type of cover.

We work closely with employers throughout the planning and application process to ensure the process is as smooth as possible, including assisting with any underwriting issues.

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1 — Scottish Widows Business Protection Report 2011

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Shareholder/Partnership Protection

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This protection is to help business owners keep control of the company should one of them die or be unable to work as a result of illness.

If one of the owners were to be unable to continue in the business, it could have a severe impact on the day-to-day operation of the business as well as financial
implications:

  • If the deceased’s family inherit the shares and are willing to sell back to the other owners, there may be issues raising the finance to make the purchase

  • Ownership uncertainty may jeopardise investor funding lines

  • If the shares are sold externally, it is difficult to say who will end up the new shareholders

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If the business pays the premiums on behalf of the shareholder, the expense can be deducted for Corporation Tax purposes. Tax implications for the individual depend on how the scheme has been structured.

We hold detailed discussions with business owners to determine the cover required and most efficient way to structure the cover, as part of our recommendation process we would review the Articles & Memorandum of Association or Partnership Agreement to support the appropriateness of this type of contract. It is also expected that a business will arrive at the final figures in conjunction with a tax or legal adviser. We work with the various providers to secure competitive rates and work with employers through the application and underwriting phases to ensure a smooth implementation process.

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Relevant Life

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Relevant Life cover is a tax-efficient and cost effective policy which allows employers to offer Death-In-Service benefits to employees.

The cover is arranged on an individual basis, and the employer is the policy owner. As the employer pays the premiums, HMRC usually class the premiums as a business expense, so it is a tax-efficient way to arrange life assurance for employees.

It can also be of particular relevance to high-earning employees who may be at risk of breaching their pension lifetime allowance. Benefits paid out from Relevant Life policies do not count towards the employee’s annual allowance, so it may be a more tax-efficient method of structuring life assurance.

Where an employer wants to offer Death-In-Service to employees but they do not meet the requirements of the traditional Group schemes, Relevant Life may be a suitable solution.

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PIB Employee Benefits can analyse the employer’s situation to determine appropriate solutions and offer support and assistance through to successful implementation of the cover.

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2 – L&G State of the nation’s SMEs report, 2015
3 – L&G State of the nation’s SMEs report, 2015

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Business Loan Protection

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When a key employee in a business has guaranteed a loan, the loss of that person could be potentially very serious for the continuity of the business.

This type of cover can help to repay any outstanding loans, commercial mortgages or overdrafts should the key employee die or be unable to work due to serious illness.

The cover pays out a sum equivalent to the outstanding debt, allowing the business to continue trading and limit upheaval in the business.

Benefits are treated as a business expense and are not taxed. Premiums are not treated as a business expense for Corporation Tax purposes.

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Disclaimers

Life Cover and Income Protection (with no investment element) has no cash in value at any time and will cease at the end of the term. If you stop paying premiums your cover may end.

Critical Illness plans may not cover all the definitions of critical illness. For definitions please refer to the relevant key features and policy documents.

Tax treatment is based on individual circumstances and may be subject to change in the future. Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from taxation, are subject to change.

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4 — Corporate debt protection: the forgotten cover for businesses as £223 billion of SME debt sits unprotected – Unbiased.co.uk and Legal and General ‘Every Business Matters’ campaign, 2013

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For more information

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