ProtectionMay 31 2013

Key-person insurance for small businesses

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BySam Barrett

While succession planning ensures large corporations are rarely dependent on individual employees, the success of small- and medium-sized companies (SMEs) is often reliant on one or two key members of staff. Business protection can help SMEs safeguard their future, but if one of these employees dies or becomes ill, few businesses have any cover in place.

According to research by Legal & General, the business protection gap is £1.35tn, up 18 per cent from its previous survey in 2011. This gap is made up of £683bn of shareholder protection; £440bn of key person protection; and £223bn of corporate debt protection.

Clare Harrop, head of specialist protection at Legal & General, believes the gap is a result of a lack of awareness about the products. “There is lots of cover that businesses have to take out such as employer’s liability, buildings and motor insurance so business protection is overlooked,” she says. “But it is crazy that a business will insure its company cars but not the person with all the contacts who is responsible for generating most of the profit.”

Business survival

Taking out key-person insurance, which Ms Harrop prefers to call profit protection, can ensure that if the individual is not around to generate these profits, alternative revenue is available. This can help to keep the business afloat while it looks for a replacement.

It can also provide reassurance to employees. Working for a small firm can pose risks much less likely to happen at a large company, so knowing that insurance is in place to cover wages if a key member of staff can no longer contribute to the running of the business gives staff security.

As well as helping safeguard future profits, business protection can also make sure the company’s owners retain control. For example, if a company has four owners and one of them dies, their share of the business would become part of the deceased’s estate. As such it could potentially pass to someone who may have little interest in the company or, worse, have conflicting views on how it is run.

To avoid this, the four shareholders could take out life assurance to cover their portion of the business, writing it in trust so the others could buy their holding in the event of their death.

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