Bob Smith is an electrician and runs his business from home.   He is 35 and married with two young children.  His wife looks after the children full time so he is the main earner.  Bob has a mortgage of £80000 and his personal income is £40000 per annum.  At present Bob has no personal insurances.

Which Insurances Would We Recommend For Bob?

Bob’s wife and children are entirely dependant on him.  They have  no other form of income apart from his earnings.  Naturally Bob realises that he is only human and accidents/ illnesses do occur and wouldn’t want to risk losing his home or financial security in the event of an accident or illness.  Bob is open to suggestions.

Our recommendations would be:-

• Life cover and critical illness cover for £80000 for Bob and his wife
• A family income benefit policy for £15000 for 16 years on an increasing basis for Bob and his wife
• Income Protection policy for £1800 per month

Bob is the main earner so it is important that he provides and income for the family.  He is particularly worried about losing his home in the event of him not being able to pay the mortgage due to accident or illness.  He knows that in the event of illness he usually has around 4-8 weeks worth of outstanding invoices but after that time there would be no income.  An income protection policy would solve this problem.  The income protection policy pays Bob £1800 per month on a tax free basis should he be unable to work due to accident or illness for 4 weeks or more.  This income continues until he is able to return to work, or his retirement age, or if he dies before the end of the policy.  At least having this policy ensures that Bob is still able to pay his monthly bills such as his mortgage, and maintain his stadard of living. 

If Bob or his wife died or suffered a critical illness during the term of the mortgage the outstanding mortgage debt would be paid off which again protects the family home.

The family income benefit would provide a replacement income for Bob or his wife if either of them were to die during the term of the mortgage.  This policy would payout £15000 per annum increasing each year in line with inflation until the youngest child had reached 21.

Bob now feels that by having theses insurances in place he is providing for his family and need not worry about losing his home in the event of accident, illness, or death.

How Does Your Situation Compare With Bob’s?

If you would like to discuss your own requirements or need advice please call us on 0870 080 2343 or otherwise complete the enquiry form and we will get back to you

What about critical illness insurance?  Does this fit into a business protection plan?  The answer is yes and perhaps it makes more sense than the life assurance requirement.  We all know we are going  to die but how many people die prematurely, ie, before old age and natural causes?  Statistically critical illness is far more likely to happen during our working lives.  Cancer Research UK states that we all have a 1 in 3 chance of being diagnosed with some form of cancer in our lifetimes so surely this is something worth insuring against?  You only have to look at some of the statistics to see that critical illness insurance does have a place in business protection insurance planning.

In the UK, one in three people develop cancer in their lives and one in four will die from it. In total in 2004, 152857 people died from from cancer in the UK. There are 289000 new cases of cancer diagnosed each year.
Source - National statistics online and cancer research website 2006.

In the UK, the lifetime risk for breast cancer in women is one in nine. In 2005 45500 women were diagnosed with breast cancer.
Source - Cancer research website 2006

In 2005 in the UK, 1 in 5 men and 1 in 6 women died from heart disease
Source - British Heart Foundation

Someone has a heart attack in the UK every 2 minutes and almost 2.6 million people have heart and circulatory disease.
Source - British Heart Foundation.

In the UK one person has a stroke every five minutes
Source - The Stroke Association website.

Every year, at least one in 13 deaths in the European Union is likely to be related to excess weight.
Source - Infant and Dietetic Foods Association.

Over 1.65 million people will be off work due to illness each year for 6 months or more

Around 120,000 people have Parkinson’s Disease and 1 in 7 are under 40 when diagnosed.

Coronary Heart Disease is responsible for 12% of all working days lost through sickness.

There are now over 700,000 people with dementia. By the year 2010 if the current trend continues this figure is expected to reach 850,000

Approximately 8,500 people in the UK suffer a Brain Haemorrhage each year, with 3 or 4 out of 10 patients being left with long-term problems

Around 350,000 people have rheumatoid arthritis.
(Arthritis Research Campaign, 2002)

There are currently approximately 85,000 people with MS. Each year, around 2,500 individuals are newly diagnosed. MS is the most common neurological disorder among young adults. People are usually diagnosed between the ages of 20 and 40, but can be older. (Multiple Sclerosis Society, 2002)

He said, ‘the treatment for taxation purposes would depend upon the facts of the particular case and it rests with the assessing authorities and the commissioners on appeal if necessary to determine the liability by reference to these facts.  I am, however, advised that the general practice in dealing with insurances by employers on the lives of employees is to treat the premiums as admissible deductions, and any sums received under a policy as  trading receipts, if:

1.     The sole relationship is that of employer and employee

This means direct employees of the company only - not employees of subsidiaries.  As a general rule of thumb if the employee is a director and has a 5% or more holding in the company the policy will not qualify for tax relief.  It is still worth asking the inspector of taxes if they are prepared to allow the premiums  for a tax deduction.

2.     The insurance is intended to meet loss of profit resulting from the loss of services of the employee

This must be loss of profits arising from loss of the key person.  A policy taken out for loan purposes would not qualify as it is for capital purposes rather than loss of profits.

3.      It is an annual or short term insurance ’

Generally, a short term policy is considered to be 5 years or less.  A 5 year renewable policy is usually acceptable.

In effect then , it is the local revenue office who will decide whether or not the policy meets the Anderson rules and whether premium relief is allowable. 

The premiums are charged through the company’s profit and loss account as usual.  The company should highlight to the revenue that the premiums have been paid and state whether corporation tax relief has been claimed or not.  The inspector of taxes then decides whether to allow the company’s claim for a reduction.

One thing to be aware of is that if premium relief isn’t requested or granted, it does not mean that the proceeds of the policy will be tax free.  If you meet the Anderson Rules then the premiums should qualify for tax relief and the claim proceeds will usually be taxable.

One day Bill is killed in a traffic accident.  Naturally Bill’s family and Ben are devastated.  From a business point of view Ben has lost a valuable partner in the business who contributed 50% to the running of the business.  He will be sadly missed and the business will never be the same again nor will it generate the same kind of turnover.

For Bill’s family things will obviously never be the same again.  They have lost a husband, father and bread-winner.  However, they still have a 50% share in the business which should give them some income.  Bill’s wife has no knowledge of the running of an estate agency business not that she is able to contribute in any way as she has children to look after.

Ben now realises that not only has he lost a valuable business partner who made the business the success it is today, but he also has a new business partner who will contribute nothing to the running of the business, yet still take 50% of the profits at the end of each year.  Ben’s own income will now suffer too.

This scenario forces many businesses to cease trading.  No one wins.  Ben has to start a new business all over again and Bill’s wife has been left 50% of a worthless company.

If Bill and Ben had shareholder protection things would have been different.  The protection policy would have paid Bill’s wife a lump sum of money equal to the value of Bill’s share in the company.  Ben would have been able to continue to run the company on his own and keep all of it’s profits.  In this scenario everyone gets their fair share all thanks to a little bit of forward planning that acts in both the businesses interests and family interests.

This case study has assumed Bill dies.  Another scenario (statistically far more likely) is that Bill could be diagnosed with a critical illness.  He would still be entitled to draw a wage from the business as he is a 50% shareholder but it wouldn’t be long before both his wage and Ben’s wage dropped significantly.  A Shareholder protection policy would  stop this from happening and protect both Bill and Ben.

Does shareholder protection have a place in your business?  What would happen to your business if you didn’t have it?  Some businesses simply say that if a partner dies their share should pass straight to the remaining partners but that is not fair to the deceased partners estate.  And besides, who would want to work hard to build a business up that leaves nothing to their estate?

If you feel that Shareholder Protection is of interest to your business please contact us on 0870 080 2343 or alternatively use the contact form

• There are over 4.3 million businesses in the UK each with their own specific financial needs, most of which have not addressed those needs
• 2.2 million people of working age will be off work for 6 months or more at any one time through illness or disability. 
• It is estimated that the current protection gap is £2.3 trillion
• At the start of 2004 24% of businesses were limited companies, 13% partnerships, 1% limited liability partnerships and 62% were sole traders. Each of these has a different protection need.

According to Gordon Brown he said, ” Britain has only one truly national resource - the talent and potential of its people.”  This is true to say but when more than 95% of Businesses have no form of Business Protection insurance in place it shows that those businesses have no idea of just how much their staff mean to them.  In most cases,  without people, the business is nothing.  Is this what your business would be?

Within the Business Protection market there are different types of insurance needs but a lot of companies don’t actually realise that they have these needs.  The larger insurance companies have now focused their attention on Business Protection and are running adviser workshops up and down the country in an effort to show advisers how their clients could benefit from Business Protection.  One of the main types of Business Protection is Keyman Insurance.  Keyman Insurance is a popular product in America where 25% of companies have Keyman Insurance in place.  In the UK less than 5% of companies have Keyman Insurance in place.  This can only be down to a lack of awareness of the insurance coupled with a lack of adviser understanding of the product.

Business Protection has always been seen by many advisers as a complex product where specialist knowledge of corporate tax is needed.  True, there are some tax issues but many of the insurance companies offer guidance on this.   The main point is that there is a need for Keyman Insurance and tax should not prevent advisers recommending this product to their clients nor should it prevent companies from protecting their key individuals.

The roadshows will help advisers to understand this product range and thus SME’s will benefit from this advice in the coming years.  Business Protection is set to grow as a market and before long it will be part of the business plan rather than an after thought.

For those of you reading this article who do not know what Keyman Insurance is, here’s a brief explanation.  Keyman Insurance is a life assurance policy taken out by a company covering an employee/s sudden absence from the business due to death or illness. 

Over 90% of companies in the UK have 10 or less employees so at least one of these people is bound to be a key employee.  That is, the employee is key to the companies ongoing survival.  He or she could be a top salesperson, an IT professional who looks after the company website, a Director or just about anyone who strives to make the company the success it is today.  So now try to imagine what it would be like if that person/s were to die suddenly or be diagnosed with a critical illness.  What would happen to the company?  Maybe:-

• There would be a drop in sales immediately which would lead to a drop in profits
• You may need to hire expert help on a temporary basis which would cost considerably
• The company probably wouldn’t run as well
• There would be a significant amount of stress placed on other members of the workforce
• Company confidence would be damaged

Clearly losing a key person is not something any company would want to go through but it is one contributing factor that can cause companies to collapse.

By having Keyman Insurance in place the company could survive the financial loss of a key individual.  The money from the policy could be used to provide compensation for the loss in profits as a result of the keymans’ death or illness.  This would allow the company time to train another employee to take over or recruit a new suitably qualified applicant.

There are many examples and case studies on the Internet as to what would happen if your business did not have Keyman Insurance but the best example would be your own if you were to let it happen.  To put things into perspective, 1 in 5 men will suffer a critical illness before retirement age.  If your business employs 10 people then there’s a 20% chance it could effect the running of the business.

Does Keyman Insurance have any place in your business?  If you would like to talk further about Keyman Insurance and its benefits to your company please either complete the contact form or call us on 0870 080 2343.

There can be a problem with this approach though.  Often enough companies also try to cut as many costs as possible including insurance premiums such as keyman insurance.  This can be dangerous to the company in a recession though.  If the company has already made some staff redundant and kept on essential staff, but one or more of those are keyman category and suffer death or are diagnosed with a critical illness, where does this leave the company?  If the company has had the sense to have keyman insurance in place then at least the insurance policy proceeds will provide the company with some funding to carry on trading and find a suitable replacement.  If, however, no keyman  insurance is in place then the company faces a very realistic possibility of closure. 

A keyman or key person is someone within the company who adds real value to its existence.  These key people often have the most contacts, sell the most, and are passionate about the company’s future.  Without them the company might not be.  Every company or business will have someone who is key to its continued success but without them the company or business would not survive.  Surely these people are worth insuring?  There is an argument that these people should be insured now, in a recession, more than any other time simply because they are the people who will get the company through the recession and ensure continued success whilst competitors fall be the wayside.

To sum up, Keyman Insurance has more relevancy now than ever before.  Think about those people in your company who make it what it is and will continue to be.