Business protection is as much of a must-have as personal protection - but it's up to financial advisers to show the way writes AIG Life's Andy Roberts.
As a financial adviser / business owner, you've probably spent long hours and weekends - and possibly sleepless nights - turning your business into an established name with your clients.
You pour over your clients' needs to make sure their families will be financially secure if something happens to them. Yet how many of you have put business protection in place to protect the legacy they've built?
Around 86% of UK businesses employ less than 10 people - therefore relying on themselves and a small handful of people to keep it running smoothly and generate profits as planned. (Dept. Business Innovation Skills, Oct 2015).
But if they or an employee were to die or fall seriously ill, the consequences could be catastrophic financially. In the time it takes a company to recover from the loss of a vital team member, profits could fall while the business adjusts to the loss of key knowledge or contacts, and finances could be stretched beyond repair.
Consider the following scenario. A director in the business dies unexpectedly - the firm had taken out a £1m loan to help it expand, but a condition of the loan was that it must be repaid on the death of a director.
The company has three options:
- It can sell assets below market value if it has insufficient liquid capital to repay the loan (which it probably does - hence needing the loan);
- It can downsize - assuming it is able to continue to exist at all; or
- It can put business protection in place beforehand to make sure the loan can be repaid immediately on the death of the director.
Realistically, no business owner wants to think about that happening.
But making sure your business clients look at this early will secure both their business potential as well as yours. The protection of human assets is as fundamental as mandatory business insurances, but is frequently overlooked.
The same goes for any company where a business owner suffers a critical illness - such as a serious heart attack for example.
Do they really expect to return to work in the same capacity as they did before the illness hit? What happens to the business then?
Financial advisers are in the perfect position to help business owners assess what they should plan for.
You're likely already advising them on how to take care of their personal finances. So here are some questions you should ask your business-owner clients:
- How would your business function if you were not around?
- What would be the financial impact on your business if you were unable to work?
- What financial support would you leave your family if you couldn't take care of the business?
- What would happen to your share of the business if you were not around?
- If you wanted to sell your shares in the business, who would buy them?
- The surviving co-owners? Where would they find the money?
- A competitor? How would this impact the business / co-owners?
- If a colleague died or suffered a critical illness, how would you finance the purchase of their shareholding?
There are several elements you will need to be familiar with if you want to help put business protection in place for your clients, and insurers like AIG have technical specialists to help guide you on the most appropriate solution should you need it.
For example, consider critical illness (CI) cover for shareholder / partner protection.
A payout would only be required if a shareholder / partner was forced to retire because of the critical illness, and the payout would need to be equal to the value of the retiree's interest in the business.
Most comprehensive CI contracts pay out on a huge range of medical conditions -including additional payments for less serious conditions, and children's cover - both of which only pay a percentage of the sum assured.
This would mean your clients paying for cover that isn't required - and even if it was, the payout would not be sufficient to buy the retiree's shareholding.
AIG's Key3 only pays out on cancer, heart attack and stroke - conditions which would be most likely to force retirement, and doesn't include any unnecessary additional payments or children's cover - making it arguably the most suitable (and indeed affordable) cover for shareholder / partner protection.
Starting the "what if" conversation about a business could be the breathing space both you and your clients need if their / your business plans are to come to fruition.
Business protection is as much of a must-have as personal protection - but it's up to financial advisers to show the way.
Andy Roberts is Technical Sales Manager at AIG Life.
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