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.