The recent floods will have left few businesses in no doubt about the wisdom of insuring their premises and equipment. But, then again, we can’t recall ever meeting a business owner who didn’t.
If only we could say the same when it comes to insuring their most important assets made of flesh and blood! The widespread failure to do so is particularly illogical for smaller firms because the loss of a single individual could threaten their very existence.
According to Legal & General’s August 2019 State of the Nation’s Small Medium Enterprises (SMEs) report, once businesses understood the consequences of losing someone important, 52% did not think they would survive the next 12 months. Yet more than half didn’t have any cover in place.
Indeed, SMEs are so vulnerable in this respect that one school of thought is that insurance to protect them against such eventualities should be made compulsory when they first set up.
‘Business protection cover,’ which can safeguard against the financial consequences of owners or key employees unexpectedly dying or experiencing serious health problems, subdivides into three main categories : Keyperson cover, loan protection and shareholder/partnership protection (which can give other business owners the cash to buy the shares from a deceased shareholder’s family or beneficiary.)
Making shareholder protection cover compulsory would certainly have saved one small business we came across from ruin. When its major shareholder died his shares passed to his spouse, who had no knowledge of the business or any inclination to get involved.
Two salespeople with minor shareholdings carried on trying to run the business, but the deceased major shareholder’s widow formed a personal relationship with the head of a major competitor. He stripped the company of all its assets, so that it became worthless and everyone lost their jobs.
If shareholder protection had been put in place here, with the relevant cross option agreement also implemented, this scenario could not have happened. The remaining shareholders would have received funds from the insurance policy to enable them to purchase the shares from the deceased’s spouse, meaning they could continue to run the business and the spouse had cash funds available to continue with her life.
Even if a business never ends up claiming on a business protection policy, the peace of mind it provides can be all-important. Just ask one of our clients who bought a hotel on a beautiful island on the west coast of Scotland with his wife!
The move required heavy borrowing and the couple, aged in their 50s, were concerned about what would happen if one of them died. Would they be able to afford to continue running the hotel on their own or would they even want to?
By putting in place a £750,000 loan protection life cover arrangement on both lives we have ensured that, should their worst fears be realised, the remaining partner could either continue running the business or be in a position to sell up and finance any subsequent plans.
Business protection policies are technically considered to constitute personal protection because they use similar life, critical illness cover and income protection policies to the individual market. But they are written in a way that means that claims pay-outs go to the business as opposed to the policyholder or their estate.
The fact they fall into a sort of no-man’s land between the individual and group market represents one of the primary barriers to growth, as few intermediaries are qualified to advise on them.
Many employee benefit consultants don’t have the necessary regulatory authority, yet many independent financial advisers (IFAs) lack the necessary experience in dealing with businesses.
However, Chase de Vere, is unusually well placed to help with business protection because, unlike many of our competitors in the employee benefits space, we also have an IFA arm.
Our regular involvement is crucial because this is a highly specialist area where dabblers may not do an adequate job. We are continually finding that the existing cover arrangements of new clients that have switched to us from elsewhere are not up to scratch.
Our expertise also enables us to greatly reduce delays and administrative hassle for clients. We can, for example, give advanced guidance on the type of information likely to be required for financial underwriting and arrange for individuals to undergo a single medical examination for several different policies.
The Financial Conduct Authority does not regulate Estate Planning.
Content correct at time of writing and is intended for general information only and should not be construed as advice.