Ask the Expert: Insuring your business against illness

Carl Lamb (inset) on getting your finances straight in 2021

Carl Lamb (inset) on getting your finances straight in 2021 - Credit: Smith and Pinching/Getty

This week our reader wants to know to insure their business against illness. 

Reader question: 

My brother and I own and run a small company which is reasonably profitable.

We have managed to build a reputation for finding innovative solutions for the goods handling sector, based in particular on my brother’s engineering skills. He caught COVID at the end of last year and was quite poorly – and our business suffered accordingly.

Can we somehow insure against him being ill in the future?


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Carl Lamb of Smith & Pinching responds:

If someone in your business has a critical role in its profitability, it does make sense to insure against any interruption in his or her ability to work.

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Key person insurance is a policy taken out by the business for such an eventuality.

The insurance can be taken out to cover any member of the business – it doesn’t have to be a business owner.

It is designed to provide the business with a lump sum that can be used however the business wants.

It might simply plug the gap in profits while the key person is absent, or it could be used to train someone to do the missing person’s job, for example. It can also used to repay business loans, if needed.

The policy will pay out if the named person either dies or becomes ill with one of the critical illnesses detailed in the policy. The benefits are paid to the company.

It might also be worth considering having some kind of shareholder protection insurance covering you and your brother, if you are the sole shareholders, to protect your business if one of you should die.

This type of insurance, in conjunction with a shareholder agreement, allows you to determine the ownership of the business on the premature death of a shareholder without compromising the estate that the shareholder leaves to his or her heirs.

Shareholder protection is taken out by the existing shareholders of the company and the shareholders pay the necessary premiums.

The policies are set up, via trust arrangements, usually with an additional agreement called a Cross-Option agreement, to cover the lives of all the shareholders.

The policy will deliver a lump sum upon the death of one of the shareholders, usually to allow the remaining shareholders to buy the deceased shareholder’s shares.

The lump sum payment via the Trust and agreements in place would eventually go to the deceased shareholder’s heirs.

I suggest you have a detailed discussion with an independent financial adviser so you can weigh up the benefits of the different types of business protection you might put in place.

This is a marketing communication. Any opinions expressed in this article do not constitute advice.

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