There are different types of business protection, many of which operate at different levels and cover different people or risks.
It is worth getting to know not just your corporate client but their whole business – and the people who make the firm the success that it is.
The type of cover will depend in part on the employees, the size of the firm, the cashflow and liabilities and the structure of the firm.
As Richard Kateley, head of intermediary development for Legal & General, says: "It depends on the make-up of the business, what they are seeking to protect and, in many cases, the age of the firm and where it sits in the business lifecycle."
Key man cover
Key man cover – or, to be more politically correct, key person cover (KPC) – is one of the most go-to areas for protection advisers.
Alan Lakey, adviser for Hertfordshire-based Highclere Financial Solutions and founder of CI Expert, thinks this is usually the “first consideration”, and explains: “KPC is usually the first consideration because for many businesses the death of non-availability of the key person could mean the death of the company.”
But who is this key person? For some firms, it might be the owner, or the chief operating officer, or maybe the sales manager. For some firms, it could be all of these roles – because one person does nearly everything.
It doesn’t matter what the job title is, effectively. If the company cannot continue to function or to function successfully without that person or persons, then this is a key risk.
Mr Lakey continues: “Most businesses have one or more people without whom the company cannot remain profitable and the company should insure them to provide for its own continuing future.”
According to Johnny Timpson, protection specialist with Scottish Widows, this is a “financial safety net” if a key person dies or – if critical illness cover is also selected – is diagnosed with a serious illness.
He comments: “Although clients cannot predict the future, KPC can protect against many business risks.”
Protecting profits and mitigating the effect of debts are two key risks. Mr Timpson outlines what KPC can do on both counts:
- Recruitment costs to find a suitable replacement.
- Loss of profits while the business is disrupted.
- Paying penalties for non or late delivery on goods and services.
- Paying any company sick pay to the key person if the claim is related to a critical illness.
- Being unable to repay a loan.
- Paying back a business overdraft.
- Nervous suppliers may demand payment of an account upfront.
- Covering owed salaries, dividends or loaned money through a director's loan account.
- KPC can also protect sole traders who are personally liable for business debt. If they died unexpectedly, any debt would be inherited by their next of kin.
Mr Kateley says: "Talking to a client about the risk of losing a key person is likely to have more success. For these companies, the death or critical illness of an owner or director can have a catastrophic effect on its future."
He points to research earlier in 2017 among 800 small-medium-enterprises, carried out by Legal & General, which found 67 per cent of new businesses would cease to trade if a key person died or was unable to work.
Business loan protection
Tom Conner, director of insurance at Drewberry, advocates putting business loan protection into place, as this can be used to cover loans of many sizes to suit businesses and their borrowing practices, no matter how large or small.