I am in the process of setting up a small business. I will be employing two people but I’m the one with the skills to make the business a success. I worry about how I would pay my staff if I was unable to work for a period. What should I do?

Lowestoft Journal: Matthew Beck is a Chartered Financial Planner with Smith & PinchingMatthew Beck is a Chartered Financial Planner with Smith & Pinching (Image: Smith & Pinching)

Matthew Beck of Smith & Pinching responds:

It is often the case with small businesses that the owner is an essential element in its success and so, by extension, is also the greatest risk. You are right to think about the implications on your business of you not being able to work for a while – but please also think about your own financial position as an individual if anything were to happen to you.

I think you would benefit from a discussion with a Chartered Financial Planner to ensure that you protect yourself and your business, with life and income protection insurance at both levels.

There are very specific business insurance policies that are designed for the scenario you describe. Key person protection provides the business with support if a named person dies or becomes ill. It can be taken out to protect against the absence of anyone critical to the success of the business.

The benefit to the business on the death of the individual normally takes the form of a lump sum, whereas if the named individual is ill, payment may be provided either as a lump sum or on a regular basis while the person is unable to work.

The policy is set up to pay out if the named person has one of a list of conditions or illnesses specified in the policy conditions. The business pays the premiums and the business receives any payments in the event of a successful claim. It wouldn’t be considered a benefit for you as an individual so has no personal tax implications.

The money can be used to keep the business solvent while you recover, or perhaps to train someone else to replace you. It can also be set up to cover the repayment of business loans.

Your business can also take out a relevant life cover policy that provides a pay-out to your family or dependants if you were to die within the policy term. The premiums are paid by the business but, in this instance, the benefits are paid to the named beneficiaries. Provided the policy can be described as “wholly and exclusively for the purposes of the business”, the premiums won’t normally be counted as a taxable benefit for you.

Starting a new business is the perfect time to get the right protection in place to ensure that the risks to both you and your new venture are carefully managed. Do take advice at this critical stage.

Any opinions expressed in this article do not constitute advice.

For more information, please visit www.smith-pinching.co.uk