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Kath and Sue are joint 50/50 owners of an interior design business. It is a Private Limited Company. With the firm maturing, they are beginning to consider taking out business protection. They value the business at £400,000 and each take £95,000 in total remuneration.
Client aims and objectives
- Understand the kinds of business protection solutions that exist.
- Understand how a business protection scheme can be tailored to their needs.
1. Understanding business protection. Clarity and precision are vital to Astute, so we would emphasise the importance of understanding how business protection works. We would explain that there are three main elements to business protection, with each being met by a particular type of insurance policy:
- Protecting the business – Key Person Insurance.
- Protecting the shareholders – Shareholder Protection.
- Protecting the shareholders’ families – Relevant Life Policies.
2. Applying business protections to their circumstances. After a period of information collecting, we
would recommend the exact protections that Kath and Sue’s business would need:
- Two Key Person Policies. These should be purchased by the Limited Company and would ensure life and critical illness cover for Kath and Sue. Should the insured sum be claimed, the company would receive one year’s worth of remuneration of £95,000. These funds could replace the loss of profits from a director passing away or being unable to work due to critical illness. The funds could also meet the cost of bringing a new key person into the business.
- Shareholder protection. Here, both directors should purchase term-related protection plans on each respective life to the value of £400,000. This protection also covers both death and critical illness. Working with Kath and Sue’s solicitor, we could draft ‘single option’ and ‘cross option’ agreements. These documents set out how funds, should they be claimed, would be distributed. Such agreements ensure a remaining director is able to purchase the shares that give them control of the company, and that the departed shareholder’s family are compensated appropriately. Relevant life plan. This life cover, term-related policy should be purchased by the company for both Kath and Sue. We would recommend an assured sum of 4 x total earnings. Payments should be placed in a Trust that benefits each director’s family.
Kath and Sue feel reassured that all eventualities are covered, and that they could securely proceed with growing their business. Should either become critically ill or pass away, the business would be compensated with funds that tackled profit loss. Furthermore, their families would receive funds for selling shares, and a capital sum. There is also a tax saving as certain premium qualified as a business expense.