Could your business continue to run effectively without you or another key member of the team? If you’d struggle and potentially suffer financially should an accident or illness affect key people within your team, you may want to consider taking out key person or shareholder protection.

If your business wouldn’t be secure should something happen to a team member, you’re not alone. According to research from Legal & General:

• 26% of small businesses in the UK would have to close immediately if a key person died or became critically ill
• A further 26% of companies think they would cease trading within a year if something happened
• 63% of businesses surveyed said they had more than one key person and SMEs were aware of the impact their loss could have on the firm’s operation
• Losing a key person was ranked as the number one concern among the 700 small companies that were surveyed

Of the SMEs that had already suffered from such an event, three in ten said losing an important employee had impacted their profits and 19% said their customers had lost confidence. Despite the risks, 70% have never considered or did not understand the need for business protection.

Richard Kateley, Head of Intermediary Development at Legal & General, said: “Small and medium-sized businesses are essential to Britain’s economy; they employ millions of people across the UK and make up more than 99% of the private sector. Yet our research shows that many of these companies could be at risk of closing their doors if a key person in their business died or became critically ill – more than a quarter would have to cease trading immediately.

“SMEs are acutely aware of the risk losing someone important to their business could have, but whilst many companies will insure their computer systems or buildings, they often don’t think about protecting their most important assets – their people.”

Providing your business with protection

There are several different insurance policies that can be used to provide a business with protection. Which one is right for your business will depend on operations, risk and priorities.

Key person protection: If your business has a staff member or director that is crucial to operations, key person protection can provide insurance. It’s a form of life cover that protects the business from losing someone that is instrumental to the financial success of a business. It would pay out in certain circumstances defined in the policy, such as the key person passing away or being diagnosed with a critical illness. This money can then be used to cover lost profits or help secure a replacement. The premium for key person protection is calculated in a similar way to life insurance and may consider the individual’s age, health and lifestyle.

Shareholder protection: This type of insurance policy can be used to provide protection against an owner or part-owner passing away or experiencing serious illness. Without an agreement in place, such an event can lead to significant uncertainty within a company and harm its financial prospects. A shareholder agreement sets out in writing what would happen in the event of an owner dying or becoming critically ill and aims to provide peace of mind to shareholders that the business could continue.

As you consider whether key person or shareholder protection is right for your business, you may also want to think about how relevant life insurance can also provide peace of mind. This type of life policy can provide financial support to the family of an employee that has passed away.

Which option is right for your business?

To choose the right type of policy and provider for your business, you need to think about how your business would be affected. Protection for your business should be tailored to its needs and most pressing concerns. Taking some time to think about where the biggest financial losses and uncertainty could come from is the first step to choosing the right type of protection. Among the questions to answer are:

• Who should be covered in your business?
• How would business operations be affected due to death or illness?
• How long would cover be needed?
• What level of cover would secure the business?
• Could other steps also improve the security of the business?

After answering these, you should have an idea of where insurance policies could support your business and provide you with peace of mind that should something happen, you’re in a better position. If you’d like to discuss the security of your business and where key person or shareholder protection could prove valuable, please get in touch. We’ll help you assess your options in the context of your own financial plan and concerns.