Any organisation in the caravan and holiday park sectors will have its physical assets insured, that’s a no brainer. But it’s surprising how many haven’t thought about key person insurance.But the loss of a senior employee, director or shareholder could have just as big an impact on the business as fraud, vandalism, fire or theft.
Business protection insurance is there to safeguard the business against the effects of the loss of a key person.If someone dies suddenly or has a serious illness or accident, there will be an undoubted impact on profits and day to day trading.And in addition to all this disruption, the organisation might not be able to repay a business loan.
Companies owned by their managers or family businesses in particular need to consider:
- Who will take control if the unexpected happens?
- What are the effects on cash flow, creditors, customers, other staff members, key customers and business relationships?
A key person protection scheme protects the company against loss of a key employee but it must be flexible because people leave and change roles, businesses grow and the key person’s value may increase over time. It is worth thinking carefully about who the key people are; it might not always be the business owners. In the caravan industry consider the sales manager, for example, who has vital relationships with holiday parks. Consider also the chief designer whose cutting edge concepts give the brand competitive advantage. For a holiday park group, consider the marketing director who is managing the customer relationships.
In a shareholder or partnership, the aim is to protect the owners of the business and their families in the event of death or illness of another shareholder or partner. The current owners will want to keep control of the company to avoid it passing to the spouse or children who may have no experience. On the other hand, it is also there to ensure the spouse or children inherit the value of the shares.
It is a condition of many loans that directors protect their borrowing liabilities for themselves and key employees. And that is particularly important for those who are guarantors for the loan as a default could have a massive impact on a family’s home and finances.
Key person cover is set up by the company and generally it owns the policy and receives the benefits, not the employee or director. It might be possible to claim tax relief on its premiums too if the company can show it is a trading expense.
How does it work?
A specialist adviser can recommend the right policy for an individual business and make sure it is structured correctly for tax purposes.
In one example, we set up a death-in-service scheme for a business to cover the cost of recruiting and replacing a partner if one of them died or had a serious illness. Just three months later that is exactly what happened and £300,000 was paid out, which was vital to the continued health of the business.
Article written by: Joe Sanders, Chartered Financial Planner, Informed Financial Planning in Hull.