Far too often small business owners, especially in the early years, find themselves working in the business rather than on the business, which leaves them consumed with the day-to-day rather than attending to their long-term financial security. Gaps can appear, such as the shortfall in business protection.
We have put together two fictional entrepreneurs – Anita and Brad – who have set up Funny Bones Physiotherapy Ltd.
Both Anita and Brad are aged 45 and held successful careers as physiotherapists. Anita had several positions with some of the leading private healthcare providers and Brad had a 20- year career with the NHS. Four years ago they branched out to set up their own practice.
It is not uncommon to see professionals embark on the entrepreneurial journey, setting up shop by themselves to capture the entirety of value in what they do. However, when they leave the employment of their respective organisation, they also leave the benefits of being employed, that is, pension provision, private healthcare and, of course, insurance, whether that be life insurance, critical illness and/or income protection.
With so many different options available it is always best to speak to an adviser however Glen Marshall has put together more information here.
As the old adage goes, we will insure everything in our lives such as cars, homes, pets etc., before even considering implementing a form of life cover. Perhaps this is down to the fact we feel a duty to protect our prized possessions, rather than ourselves and family. Following the last 18 months, many have reviewed this position and realised the need to protect themselves and their family.
It is important that we consider that Anita and Brad have taken more risks and it could be time to contemplate how they could protect their individual families financially for the future.
There are several different scenarios including life insurance, usually taken to provide financial support in the event of death. However, there are many adaptations of life cover to consider, and these are usually flexible to meet the intending beneficiaries’ requirements. For instance, a whole of life policy is guaranteed to pay-out upon the life assured’s death (provided premiums and terms are met), whereas a more specific term assurance policy would be utilised to provide a certain level of cover for a set period of time. Another important consideration would be whether to provide an element of critical illness cover inclusive within the policy.
As Anita and Brad are now self-employed, it may be time for them to consider protecting their income for their respective families as they will no longer be entitled to statutory sick pay.
An income protection plan is a long-term policy that will pay a regular monthly income if you become unable to work due to long-term illness or incapacity. There is an initial waiting period before the benefit is payable on a claim, which is referred to as the ‘deferred period’.
For more advice on this stage of your business life, including Family Income Benefit (FIB) protection, you can read Luke Edmond’s article in full here.
Fast forward 15 years and Anita and Brad are looking towards retirement and how they can protect their families.
While they have successfully grown their business, they are both aware that their families do not want to take it over, resulting in Anita and Brad deciding to sell the business before retiring. This means they will need to adjust their protection strategy and it is time to start looking at a whole of life (WOL) policy as an inheritance tax (IHT) strategy.
WOL is a type of life insurance policy which ensures that, no matter when you die, your beneficiaries will receive a lump sum pay-out from the provider. As long as the premiums are paid and policy terms are met, the cover will last until death occurs.
For instance, Anita is married and on the first death of her or her spouse the spousal transfer of assets will be exempt from IHT, so she is considering implementing a joint-life second death policy for her and her spouse, ensuring on the second death the policy will pay out.
The policy would be written in trust for the benefit of their children and grandchildren, who will eventually inherit their joint estates and therefore, circumventing probate and IHT consideration on the sum assured. Consequently, the funds paid out to the beneficiaries will usually not only be free from IHT but could provide much needed short-term liquidity for the beneficiaries, including the ability to settle any IHT liability on the estate.
As with all aspects of financial planning there can be drawbacks with one of the negatives being that WOL policy monthly premiums can cost substantially more than term assurance policies, which is often a deterrent. However, this is due to the nature of the policy becoming more expensive to establish the older the individual gets.
Equally, the premiums may count as potentially exempt transfers (PETs) or chargeable lifetime transfers (CLTs) which could use up some of the nil rate band(s) but structuring this to be paid out of surplus income can mean the gifts are immediately exempt.
Anthony Rowe writes in more detail about the IHT implications in retirement and a solution that could be considered to mitigate the liability here.