Our financial planning series continues with some advice about Keyperson arrangements, from Guy Dawe and Ian Potter from Morgans Ltd.
It is tempting not to think about issues such as critical illness, because we like to think that it only happens to other people. At the same time, many business people do not understand their own worth. This is a false economy in the long run and we hope this article will explain why.
Whether you are a sole trader, partnership or company it is vital that you protect the viability of your business in the event of death or critical illness.
What would happen to your business in the event of;
1. A long illness or critical condition (sole trader)
2. Death or illness of you or your business partner (partnership)
3. Death of illness of a co director (company)
I will try to bring these issues to life in the following case studies.
Case Study 1: Craig, a Sole Trader
Craig is a sole trader aged 30 and has a business record providing profits of about £30,000 per annum.
Craig is concerned should he fall ill for a lengthy period of time. A Keyperson policy could provide about £1,000 (£12,000 pa) tax free income for up to twelve months from just £15 per month and the plan has a maximum term of 20 years.
The maximum benefit Craig could apply for would be about half his profit.
Case Study: Jenny and Craig, Partners
Craig has become a partner in the business to Jenny and he is now aged 40 with recorded profits of £30,000 per annum.
Craig wants to revisit his need for a Keyperson Assurance Plan for £1,000 per month (£12,000 pa) and has noted that the premiums have increased and now start at about £25 per month for a twenty year term.
Craig will write the plan in his own name and receive the benefits. This means that in the event of a claim there would no stress on the partnership, as he would not be relying on the partnership’s profits to maintain his income in the short term. At the same time, Jenny knows that the partnership profits will not be used as a source of income for Craig if he is ill for a period of time of up to one year.
Essentially this plan protects both Craig and Jenny.
Case Study: Jenny and Craig Ltd
Craig is now 50 and he and Jenny have converted their partnership to a company. He receives £10,000 as a salary and £20,000 as dividends from the business.
Because dividends are calculated at a rate of half the salary when determining maximum benefits, this means the maximum benefit is £833.33 per month (£10,000 pa).
The maximum benefit age is 65.
The likely cost of this plan may be about £40 per month for a fifteen year term to age 65.
The plan is written so that the benefits are paid to the company who continue to pay Craig his salary and dividends during the claim.
The premiums are treated as a benefit in kind for Craig and a business expense to Jenny and Craig Ltd.
The reason Keyman Assurance is so popular is that essentially it protects the individual or the company from loss of income or stress on the individuals/partnership or company finances.
A lot of small struggling businesses go out of business because of the lack of some basic planning for unexpected and unwanted circumstances.
Morgans Ltd can quickly and easily assists a business in reviewing and prioritising the needs of the business.
If you have any queries regarding business protection or personal protection please feel free to contact;
Guy Dawe or Ian Potter
01225 473954 01225 473922
07738 538631 07702 876961