Advisers are being urged to speak to their entrepreneurial clients about protecting their businesses as research shows one in four small to medium size businesses would have to immediately close if a ‘key person’ died or became critically ill.
Legal & General surveyed more than 700 SMEs and found 15 per cent which had experienced a ‘key person’ becoming ill or dying had shut their doors.
A key person was defined as someone whose illness or death would directly cause a financial issue for a business.
According to L&G, the research showed 1.5m SMEs would be at risk of immediate closure should a ‘key person’ in the business become out of action, while a further 26 per cent of companies said they would cease trading within a year.
L&G also found nearly two thirds (63 per cent) of the businesses polled had more than one ‘key person’ and most were aware of the impact their loss could have on the firm’s operations.
L&G found losing a ‘key’ person was ranked as the number one concern and of those who had already suffered from such an event, 30 per cent said it had impacted their profits and 19 per cent said it had lost them the confidence of their customers.
At the same time the majority of businesses polled (70 per cent) had not considered or did not understand the need for business protection and 48 per cent did not have cover in place for any of the risks of key person, debt or share protection.
According to L&G, there is an opportunity for advisers to “kickstart conversations” with their SME clients about business protection, as almost two-thirds (63 per cent) of business owners polled said they would be happy to be contacted by an adviser about this type of insurance.
Business protection (life insurance or critical illness policies that cover the ‘key people’ in a small to medium company) can protect businesses against critical events by providing a lump sum towards business costs if a key person falls critically ill or dies.
Richard Kateley, head of intermediary development at L&G, said: “SMEs are acutely aware of the risk losing someone important to their business could have, but while many companies will insure their computer systems or buildings, they often don’t think about protecting their most important assets – their people.
“Without the relevant business protection, the impact of losing a key employee or business owner could threaten the ambitions and hard work of SMEs up and down the country.”
Mr Kateley thought financial advisers had a critical role to play in changing this situation, stating that three quarters of SMEs who had taken out business protection had sought advice beforehand.
More broadly, a recent government paper showed SMEs accounted for more than 99 per cent of Britain’s private sector and employed more than 16m people.
As the research found about 3m companies could be at risk of closing within a year of losing a key person, it would mean around 4.3m employees had little or no protection against losing their jobs if their employer suffered from a critical event.
Tom Conner, director at Drewberry, said: “This highlights the need for business protection insurance.
“Businesses across the UK are hugely underinsured and this is primarily because so many businesses don't know that business protection products exist.
“As an adviser, it was very pleasing to see that such a high proportion of business owners were happy to be contacted about this important cover. There's a big opportunity out there for advisers.”
Recent research by SwissRe also highlighted a shortfall of business protection in the market, stating that for 2017 it accounted for only 2.5 per cent of all term life insurance and critical illness sales.
The SwissRe report stated: “While a larger business is more likely to build succession plans smaller businesses are more vulnerable.
"Protecting those that make it happen should be a fundamental part of a business plan, be it staff, owners or shareholders.”
imogen.tew@ft.com
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