Essential for most firms but it must be taken out in conjunction with the right advice
Far too many businesses don’t yet have business protection – keyperson cover, loan protection or shareholder/partnership protection – to safeguard against the financial consequences of owners or key employees unexpectedly dying or experiencing serious health problems.
This is certainly strange when they invariably state that their most valued assets are made of flesh and blood but when they would also never dream of leaving other assets like plant and machinery uninsured! For smaller businesses it is particularly illogical as the loss of a single individual could threaten their very existence.
One of the major barriers has been that this field has traditionally been regarded as prohibitively complex, but this is never an issue for firms with access to the right advice.
An expert adviser can handle all the technicalities and significantly reduce delays and cut down on the hassle involved for clients. It can, for example, give a valuable heads-up on the type of information likely to be required for financial underwriting and ensure that an individual only has to undergo a single medical examination for several different policies.
Chase de Vere is unusually well placed to help in this respect by virtue of the fact that, unlike many of our competitors in the employee benefits space, we also have an independent financial adviser (IFA) arm.
Business protection falls into something of an awkward black hole between corporate and individual business, which means that few intermediaries choose to advise on it.
It is technically an individual insurance policy. However these are written in a way that means that claims pay-outs go to the business as opposed to the policyholder or their estate.
So many employee benefit consultants choose not to deal with it and many IFAs lack experience in dealing with businesses.
We are regularly finding Key Person Insurance that has been set up incorrectly when reviewing the existing cover arrangements of new clients that have switched to us from elsewhere. Showing the need for businesses to use a specialist with a full understanding of how the policy should be created.
A recent case of an IT consultancy with a turnover of around £2 million particularly springs to mind. Valued at £1.36 million and owned by two shareholders with a 50% holding each, its business protection arrangements were barely worth the paper they were written on.
They purported to protect the business against the loss of each shareholding director through £450,000 of life and critical illness cover. The shareholders thought they had shareholder protection in place, however after review this was a relevant life policy which would provide their respective wives with £1,000,000 each. This amount wasn’t even in line with the business valuation.
But, although the correct amount of keyperson cover was in place, it was set up with the beneficiary being each director’s spouse or estate as opposed to the business. This would not have helped the business in any way and it completely defeated the reason for the insurance being taken out in the first place!
Amongst other problems, the £1 million their spouses would have received from the Relevant Life cover upon death was insufficient for dealing with the sale and purchase of the shares in the business.
We rearranged the covers and, where appropriate, changed cover limits and the setup to avoid all these problems, even removing a health exclusion for one director for any illness relating to the liver.
The new policies now satisfy all the requirements of the business and its shareholders, with only a small increase in costs – due primarily to the fact that both directors are now a few years older.
Unfortunately, had their original advice been correct, the age of the directors would have made the cost of insurance cheaper and the business would have been spared the inconvenience of such a re-broking exercise.