The following are the key areas of financial risk posed by the loss of staff due to death or long-term illness. As part of a business continuity plan, Tapper Financial Services can help limit the financial risk to a business, posed by its employees. Take a closer look below to understand the issues and the insurance solutions. 

The Issue - The average debt owed by small and medium businesses with company loans is £200,000, (previously suggested in research by L&G)* according to research by Legal and General. Less than half of firms have any financial plan on how to repay the debt in case of death or illness of key staff. 

The Effect – Many loan arrangements insist that a company debt is repaid immediately on the death of the director. Banks may even require repayment on serious illness. Finding funds to repay debts immediately can cripple a business, compromising creditworthiness and reputation, which in itself can lead to business failure. 

The Solution - Setup life and illness insurances based on the term, type and value of the debt, which is payable on death or critical illness of the director. (Directors’ loans also need to be repaid on death so the same solution applies here) 

 

The Issue - Most growing firms will eventually depend on certain key staff for generating the income of the company. These key staff may be typically found in sales, marketing or IT departments. Long term illness or death of key staff has a serious effect on the performance of a business. 

The Effect - The loss of key staff means that there will be a calculable loss to the business. The majority of small and medium businesses rely on at least one or two key staff members to create most of the profit. Surveys have indicated that up to 60% of businesses would cease trading within one year, if key staff were to leave. 

The Solution - Set up life, illness or income insurance that will provide adequate funds to replace the individual and the lost income for the company, until a replacement can start to generate income once again. 

The Issue - If a shareholder dies the legal heirs inherit a part of the business. 

The Effect - The inherited shares are now in the hands of the deceased's life partner who may well be unlikely to possess either the will or the skill to be a part of the business. Without liquid funds, both the business and the heir/shareholder may find themselves in a position where there is significant risk to the viability of the business. There may also be a risk to the personal finances of the deceased's family. The heirs may want the value of the shares, and the business may want to control the shares. However, without available funds there may not be a solution for either side. Finding the funds to settle the issue can pose a serious financial problem for the company. 

The Solution - Life and critical illness insurance is set up to reflect the director’s agreed share value. At the same time, a double or cross option agreement is established, which obliges the heirs to sell the shares and the business to buy them. Critical illness usually involves a single option agreement which allows him to sell his shares if required, and a company has to buy them. Note that whilst the articles of association of the company may well specify what should happen to shareholding in case of death, the actual financial instrument to achieve this may be missing. Life insurance will provide the solution. 

The Issue - A key member of staff is unable to work due to ill health and stops producing income for the business. 

The Effect - The business depends on the work of the individual to generate the income required to keep a business afloat. Without this income, the business would be unable to pay company costs. The company might need to plunder other resources to pay its debts or potentially it might fail. 

The Solution - A key man income protection policy will maintain a monthly income to cover the lost revenue for the company, that would have been generated by the member of staff. 

The Issue - A key member of staff is unable to work and stops producing income that pays his his/her salary, however there is a contractual obligation to keep paying that salary. 

The Effect – The company may not be able to maintain the salary of the individual which causes serious financial distress. The company may not be able to keep employing the member of staff. 

The Solution - Taking out an executive key man income protection policy will ensure that the employee’s salary is maintained, if they are unable to work through accident or illness. The benefit can include salary, dividends, P 11d benefits, and even income that a spouse might lose if she cannot work because she has to look after the sick employee and has no other income or insurance! (available from Legal and General) 

What – A life insurance policy for a company employee where the policy is owned and paid for by the company. This can be either a member of staff or a director. 

 

• Premium payments are tax deductible for the business. 

• Any insurance claim (known as the benefit) is paid free of tax. 

• This can be very attractive to employees and company directors because the company (not the individual) pays the premiums for the insurance policy. 

• Also amount of insurance benefit received can be up to 30 x gross annual income subject to HMRC rules and insurer limits. (group life insurance is typically 5 x annual income). 

• This is a highly tax efficient insurance, especially for company directors. 

• This is a useful alternative where a company might not have enough staff to qualify for a group insurance scheme 

What – A policy which is taken out for a group / all of the employees of a company, rather than for one individual. 

• Group policies provide excellent life and illness insurance which can be especially attractive for employees, who might otherwise be underinsured or have no insurance at all. 

• There is no individual underwriting, which can be very important indeed for employees who might suffer from medical conditions or whose lifestyle could make insurance more expensive. (a possible advantage over relevant life insurance) 

• Group insurance can be set up according to chosen preferences by the company and these may include life, and/or critical illness and/or income protection. 

• Additional well-being benefits can also help to generate even more goodwill with employees. 

• Group insurance schemes are highly tax efficient 

• One policy will cover a very large number of employees.