A business can find itself in serious trouble without a key person. The loss of knowledge, skills and contacts can hit revenue hard, potentially spelling the end for long-standing contracts and customers. It can also create uncertainty around ownership and the company’s future direction.
Although it’s impossible to predict who will be affected by a serious health problem or may die prematurely, it is easy to put a financial safety net in place to protect the business if the unexpected does occur.
The most common type of policy, key person insurance, will provide the business with a lump sum that can be used to ensure business continuity. This offers security for any company with a high dependence on an individual and can be taken out against a number of different people within the organisation.
With loan protection, the purpose of the policy is more specific. Loan protection ensures that any outstanding business loans are repaid. Often these are taken out on the back of a personal guarantee and will need to be repaid on death.
Shareholder protection is designed to enable the business to buy back shares in the event of one of the shareholders becoming seriously ill or dying. We see this as crucially important in ensuring that a business doesn’t fall into the wrong hands.
Relevant life cover, which provides a lump sum to the key person’s family if they die during the policy term, also falls within the business protection arena. Although it doesn’t strictly benefit the business in the event of a key person’s death, it is a very tax-efficient way to provide an attractive benefit and it falls outside the pension lifetime allowance.
Communication is key
Unfortunately, while the loss of a key person can hit a business hard, it’s a topic that’s rarely on the risk management agenda.
No market statistics are available but anecdotal evidence suggests that only around one in 10 businesses have the necessary protection. There are a number of reasons for this, but primarily we find that many business owners are unaware of the different types of cover and security it could offer them. It’s therefore important for advisers to speak to business owners within their client book and communicate the risk to their business if something happened to a key person or shareholder.
As well as reaching out to existing clients, the growth in the numbers of people self-employed or who have set up a limited company is also creating opportunities for business protection advice. Government statistics show there were 5.4 million microbusinesses (up to nine employees) in the UK in 2018, accounting for 96% of all firms[i]. Where a business is this size, its success, or failure, is hugely dependent on its employees.
Companies are also increasingly looking for more value out of their insurance. Vitality’s approach offers businesses more than a financial safety net, giving access to a range of incentives, rewards and benefits linked to health and wellbeing. These are also designed to reduce the chances of ill-health which is important given that a healthier workforce is linked to improved productivity, and lower absenteeism and presenteeism in the workplace.
Business protection can be perceived as prohibitively expensive, but in reality life cover for business protection is relatively affordable. Premiums do increase significantly where insurance against disability is added for the full sum assured, but there is the option to add a lower level of disability cover to deal with affordability constraints.
It’s also worth thinking about where the company’s heading. The plan that’s put in place now may be different in a few year’s time when the company has grown, so long term cover may not be needed.
Running a business is often fraught with risks. Business protection reduces some of those risks and helps secure a successful future.
[i] House of Commons Library, Briefing Paper – Business Statistics.