Think Business Protection, Think Longhurst, Part 2

Longhurst Limited

6th October 2018

Think business protection – Think Longhurst

 

This article forms the second half of a two-part series where I explore business protection, and specifically ‘human insurance’ for the business owner and their key employees.

 

PART TWO – THE LIMITED COMPANY 

 

What is a limited company?

  • A limited company is a legal entity in its own right, owned by its shareholders and run by its directors.
  • Unlike a sole trader or ordinary partnership, the shareholders enjoy liimted liability – to the limit of their investment in the company. However, lenders in particular may require personal guarantees from the directors. 
  • In most private limited companies the director(s) will be shareholder(s).

 

Key Person Cover and the Limited Company

  • Who is vital to the future success of the business? Often in small companies this will be a shareholding director.
  • The company would normally apply for cover on the life of the shareholding director or an employee if they are a key person. No trust is required and in the event of a claim the company receives the funds.
  • An alternative approach, if all shareholding directors are key, will be for each director to take out a policy and place it in a business trust for the remaiming co-directors. In the event of a claim, the trustees could lend funds to the company or retain them if the company’s financial needs were lower than orginally anticipated.
  • This route can also accomodate funding for a shareholder purchase arrangement – either by an addition to the sum assured or via an additional policy which is subject to the same trust.
  • Yet another approach, perhaps where there are only two shareholding directors, would be for them to each take out a policy on the life of the other.
  • In most instances the company can offset the cost of the insurance premiums as a trading expense, subject to certain conditions being met, and the company accountant being happy to sign them off.

 

Don’t Overlook Relevant Life Plans

  • Identical to ‘death-in-service’ but designed for owners/managers.
  • The business takes out a life insurance policy in the name of said owner/manager.
  • The business benefits from tax relief on the insurance premiums.
  • In the event of a claim, the benefits are paid directly to the estate of the owner/manager.
  • Again, in most instances the company can offset the cost of the insurance premiums as a trading expense, subject to certain conditions being met, and the company accountant being happy to sign them off.

 

Providing Cover for Business Loans

  • Newly formed, or rapidly expaining businesses will often seek to borrow the additional funds thry reqyire from a bank which often makes it a condition of the lending that appropriate life and possibly critical illness cover is in place.
  • In this event, the lender will specify the amount and duration of cover required, and would normally take a mortgage assignment over the policy.
  • Cover will normally be required on the business owner(s) but in some cases may be reqired on an employee who is a key person.
  • In the event of a claim for death, terminal illness, or critical illness, the lender is entitled to the policy proceeds to repay any outstanding loan. Any balance of funds available after repayment of the loan would be paid to the life assured/their estate where an own life policy was taken out, or to the policy owner where life of another was in place.
  • Once a loan has been repaid, the lender will normally dischrge the mortgage assignment and inform the provider.
  • And, once again, in most instances the company can offset the cost of the insurance premiums as a trading expense, subject to certain conditions being met, and the company accountant being happy to sign them off.

 

Next steps

If this article raises further question for your business, and your situation, contact me.

All discussions are confidential and held at my expense. We can talk through any concerns you may have, and then go to the whole market to obtain no-obligation quotes.

Nice and easy, and very quick.

 

Think Business Protection, Think Longhurst.

 

 

Chris Broome FPFS is owner and Chartered Financial Planner at Longhurst. Longhurst are a firm of lifestyle financial planners and independent financial advisers based on Silverstone Park and a member firm of the STC. 

We’re also the folks behind the Inside Silverstone business podcast, so get in touch if you’d like your firm to appear on the show!

 

Contact:

W: www.longhurst.co.uk

E: chris@longhurst.co.uk

T: 01604 210636

M: 07793 841654

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