Matt Johnson owns a graphic design company that employs 15 people. He has decided to purchase larger premises and the profits from the business easily cover the repayments. However, Matt is concerned about what would happen to the business if his key sales consultant, Paul, 35, was off work long-term due to injury or ill health. Matt has recently employed two more sales consultants, but wants to know how he could protect the business if Paul was unable to work. What options should he consider?
Iain Henshall, Towry Law Financial Services
A number of solutions are available to address Matt's concerns. Statistically, a third of all people will contract cancer in their lifetime and one in eight people in the UK have been diagnosed with disease of the heart or circulatory system. Paul is key to the profitability of the business and his contribution to profit should be protected through insurance.
Cover for five years would be suitable as this should allow the two new sales consultants to become established, reducing the risk in the future.
To cover Paul, a 35-year old male, for £250,000 payable to the business on his death or diagnosis of a critical illness (CI) or total permanent disability, a five year term assurance policy for £58.66 per month from Scottish Equitable Protect can be provided. For a slightly higher premium, the option to renew the policy at the end of five years is available without further medical underwriting.
As an alternative to a lump sum payment, a regular income could be payable to the business, which in turn could be used to continue to provide an income to Paul while he recovers, or to replace lost profit and even pay for a temporary replacement sales consultant. Typical cover of two and a half times Paul's salary can be arranged. Benefit of £10,400 per month on a claim during a five-year term policy is available from £186 per month.
Generally, the use of any existing life assurance policies should be avoided as this can result in a capital gains tax liability on future claim proceeds. Alternative options should be considered where the key person being covered by insurance is also a shareholder in the business.
Rod McKie, Scottish Equitable Protect
Matt can minimise the risk of losing Paul by taking out a key person protection package. Paul can be described as a 'key person' if he has skills or experience that would be lost to the company, and that are not easily replaceable. For example, if he has built up a significant client base and has important relationships with key customers, and has exceptional knowledge of the industry.
To calculate the appropriate level of cover we would need to assess the cost of replacing Paul, and the company's gross profits that are directly attributable to Paul.
Matt should consider taking out lump sum life with CI protection to cover loss of profits in the event of Paul's death or his suffering a critical illness. He should also contemplate key person income protection (IP) to protect the firm against Paul's absence due to accident or sickness. Matt should also consider lump sum protection to protect the loan taken to purchase the new premises.
It is unlikely that Paul will still be key after five years, as there will be other sales consultants who will be bringing in a share of the business's sales. A two-year benefit payment period, therefore, should be sufficient to cover any loss of profits.
Assuming Paul is a non-smoker, a key person income protection, with an annual benefit of £100,000, two-year payment period, four-week deferred period, including waiver of premium, would cost £129.49 per month. A life policy with CI protection, including total and permanent disability on an own occupation basis, lump sum benefit £200,000, would amount to £51.36 per month
Sue Wilkinson, Scottish Provident
Assessing the protection needs for Matt's business is key and he has clearly identified that cover for Paul is his first priority.
I would propose an IP Self Assurance plan, which would pay benefits to the company and afford Matt some protection for company profits. Assuming a salary of £35,000, it would cost £24.69 per month for an income benefit of £17,500. Options such as CI and life cover for Paul should also be considered. Matt could therefore take out a Pegasus Whole of Life plan, which would pay benefits to the company. For a sum assured of £350,000, it would cost £103.90 per month for death or CI cover. In addition, when Paul retires, the plan could be transferred to his family.
There are several things Matt has to bear in mind if Paul is off sick long-term. If a new person is recruited he or she will need time to settle in, be as effective as his or her predecessor and start making a real contribution to profit. Important business contacts can be lost if key customers see Paul as 'the face of the company'. If profits fall, Matt may not have enough money to cover expenses - particularly as he is considering moving to larger premises.
It is not uncommon for companies to look at salespeople first and overlook others, such as finance managers, who are responsible for setting up loans and overdraft agreements with banks. If they are off work long-term, Matt's problems go beyond providing cover for Paul. Therefore a good overall exercise is to look at all employees and assess their individual impact on the business.
