Insurance, whether business or personal, is often prompted by compulsion rather than need. Cars must be insured, all but a few chancers protect their homes and the majority sufficiently cover contents. But when it comes to businesses, many are falling short, especially in protecting arguably the most important asset – people.
Insurance can play a crucial role in ensuring that we, our loved ones and our business partners can cope financially in times of need. Larger businesses are better placed to absorb the financial damage caused by the death or serious illness of an important member of the business. Borrowings, key employees and loan accounts are all areas that a business may need to consider protecting in order to weather the potential turbulence caused by death or serious illness. Providers and advisers are now starting to see business protection as a vital opportunity.
“It is a very important part of our business,” says Andrew Simmons, business protection specialist at Vitality Life, formerly PruProtect. “We have a team of three business protection specialists, supporting our consultants and advisers in the market place, who need a bit more advice on the trusts and setting up the arrangements,” he adds.
Who holds the key?
Key man insurance is life or critical illness cover specifically for the people who are crucial to the operation of a business – those whose absence would have a severe impact on future profits or existence, especially if the business is small. According to research in March 2015 by Legal & General, over 20 per cent of businesses between two and 10 years old would cease trading after losing a key person; and more than 50 per cent would only last up to a year.
Not only that but debt is on the increase, with average business borrowings at £344,000. Dougy Grant, protection director at Aegon UK, says this means small and medium-sized enterprises (SMEs) are being targeted by providers. “Our business protection is very much aimed at SMEs,” he says. “If a key person in a large business was to become ill or die, that business would generally have succession plans in place and be able to cope. It is the small businesses that are most at risk – those where the partners are often the key distributors, or where the relationships and the revenue are closely linked through the individual partners themselves. Those businesses can fold, and employees could lose their jobs if one of the partners is off sick.”
Alan Lakey, director at CIExpert Ltd, believes public awareness of the need to protect businesses is low. “Generally speaking,” he says, “they start from a position of ignorance, and this also applies to solicitors and accountants. Unless they’ve got an adviser, they really don’t know what they should do, or that there’s something out here designed to solve their problem.” Mr Lakey says companies are often unaware that many protection plans are allowable as a business expense. “When you tell them there’s a problem solver that gives you tax relief, that’s when they get quite excited,” he adds.
Protecting your share
Aside from key employees, it is vital for the owners of the business to ensure that their share is protected, so that the business can continue to operate should they die. If a shareholder or partner dies, their share generally passes to the estate. This can cause problems, especially if the surviving spouse has no intention of being involved in the business, as he or she will be entitled to assets and a share of profit.
Mr Lakey explains how this problem can be solved. “You take a life assurance and that gets placed into trust for the benefit of the other director or partner, with a double-option agreement,” he says. “If the director wants to buy the shareholding from the widow, then the widow must sell; and if the widow wants to sell, then the other director must buy. All you are doing is making sure the money gets into the right hands at the right time.”
The effect of illness
According to a report from the Centre of Economics and Business Research (CEBR), long-term sickness absence costs UK private sector businesses £4.17bn a year. This is expected to reach £4.81bn by 2020, a 15 per cent increase – suggesting employees’ health and well-being is important for any size of business. To help businesses address this growing concern, Aegon UK has launched a health and well-being support service, including business policies, for protection customers. Aside from paying out on protection claims, the service will offer counselling for bereavement, health concerns and work-related stress.
“Our emotional and mental health is being taken much more seriously and rightly so,” says Mr Grant, who adds, “When we pay out on a claim it’s always a very distressing time for families and businesses and we want to recognise and provide a little bit more than just the financial payout of claim. An event such as death, diagnosis of a critical illness, or being unable to work is a very emotionally stressful period and sometimes they just need to talk to somebody.”
Becoming relevant
As businesses evolve, insurance products offered by providers must follow suit. Relevant life cover is a life insurance policy available to employers that provides an individual death-in-service benefit for an employee. It is designed to pay a lump sum if the person dies or is diagnosed with a terminal illness while in employment. Premiums are tax-deductible as a business expense; and as policies must be written under discretionary trust, benefits are also free from inheritance tax. Unlike registered group life schemes, benefits do not count towards the lifetime allowance and so could be attractive to high earners, as the allowance has recently been reduced to £1m.
Aviva managed to go one step further recently, by introducing the first relevant life plan with integrated critical illness cover. This caused a stir in the protection industry, with Legal & General alerting the HMRC to question whether the CI component was allowable under the plan.
Mr Lakey says L&G’s efforts to scupper the product release are likely to fail. “There has been no response yet from the Treasury, which leads you to think that it’s allowable,” he explains. “Had it been exposing a loophole they would have closed it pretty quick.”
He adds that many large IFA networks are “holding fire” before recommending the product, as they wait for clarification from the Treasury, “They don’t want to get involved in something that is appealing and then turns out to be retrospectively banned, causing them a lot of problems to untangle. But you can bet your bottom dollar every other insurer is working on its own version as we speak.”
Mr Simmons is cautious about reacting to Aviva’s offering, and he says Vitality Life is still considering its response. “Legislation hasn’t actually changed,” he says, “and at the moment we still have only one company that has developed a contract that is different from the rest of the market. So it’s a situation we are continually reviewing, but we’re not in a position to make a statement one way or the other at this moment in time.”
Mr Grant says providers will have to evolve if they are to get more businesses to consider protection.“We are constantly looking at the proposition and not resting on our laurels,” he says. “We’ve still got a way to go both within Aegon and the industry as a whole to make things easy to protect your business.”
