Key person cover, relevant life cover, shareholder protection and personal guarantees. What each is for, and the entries in the accounts that show one is missing.
The signs that protection is missing are in the accounts. Borrowing, dependence on one person and the share structure each show in the accounts, although the accounts do not describe them as risks.
An owner-managed company can be exposed in three ways. It depends on one or two people, its bank borrowing may carry a personal guarantee, and its shareholders may have no agreement about what happens if one of them dies.
The company insures itself against losing the person it depends on. It pays the company, so the business can keep trading while it recovers or is sold. HMRC allows the premium as a deduction where the cover is short-term and solely to protect profits, and the payout is then a trading receipt (HMRC Business Income Manual BIM45525).
Life cover for an individual director or employee, paid for by the company. It pays out only on death or terminal illness before age 75 and has no surrender value. The premium is not a benefit in kind for the individual (Income Tax (Earnings and Pensions) Act 2003 s.393B; HMRC Employment Income Manual EIM15045).
Cover paired with a cross-option agreement, so the surviving shareholders have the money to buy the deceased shareholder’s shares and the family receives cash for them. The agreement is drawn as options because a binding contract for sale on death loses business property relief (Inheritance Tax Act 1984 s.113).
Life cover, critical illness cover and income protection for the individual and their family, held personally.
If a company with borrowing, employees and dependants shows no insurance premiums, ask whether anything has been arranged personally.
Two or three shareholders and no cross-option agreement is a gap the accountant can see. The shareholdings are on the confirmation statement and the agreement, if there is one, is in the file.
Without an agreement and the cover to fund it, the death of one shareholder leaves their family holding shares in a private company they cannot run, sell or easily value, and leaves the surviving shareholders with a co-owner they did not choose.
Those are factual questions about existing arrangements, and asking them is not regulated advice.
Premiums depend on age, health, smoker status, the sum assured and the term. The Equity & General financial adviser quotes them. Do not tell the client what cover is likely to cost.
Relevant life cover is paid for by the company and is not a benefit in kind for the individual (HMRC Employment Income Manual EIM15045). A personal policy is paid from income after tax.
You are describing an exposure you can see in the numbers. Recommending a policy is regulated advice.
Wording you can use“I noticed the new facility went on the register last year. Is there a personal guarantee behind it, and is there any cover against it? If not, would you like half an hour with the financial adviser we work with, to look at what happens to the guarantee, and to the family, if something happened to you?”
Do not indicate the type of cover, the amount, or whether a particular arrangement would be suitable. That is the financial adviser’s work and it is regulated.
When several gaps are visible at once, start with what the client would lose. Do not mention products.
Equity & General is authorised and regulated by the Financial Conduct Authority. There is no charge to your firm, and we do everything to set it up for you.