There are so many aspects of a business that require protection so why are advisers shunning this sector? Alun Beynon investigates
There are nearly four and a half million businesses in the UK, and the potential market for life cover alone is £500bn. So why are advisers not making the most of the business protection market?
To start with the basics: what exactly is business protection? Well, as the name implies, it is a way of protecting a business if something goes wrong. There are four elements to it: key person insurance; director/shareholder protection; partnership protection; and business loan protection. These can provide an essential safety net for businesses of all sizes.
Key people
Every business has certain people who are central to its success and prosperity - people whose death or disability would have a serious effect on the company's future profits. This could be anyone from the sales director to an employee with specialist knowledge and experience.
And if the worst does happen, that is where key person insurance can help. It is essentially a loss of profits insurance, designed to provide funds for the business to continue if a key person dies or falls seriously ill. Every business is different, but most directors will know which staff members are fundamental to its prosperity. By making regular payments during the life of a business protection policy, a cash lump sum or income can be paid should a claim be made, preventing the potential damage caused by the loss of key personnel.
Private companies are run by shareholders or directors. On the death of one director, the surviving directors risk seeing the shares of the deceased passing to someone with no interest in the company. Director/shareholder protection can place funds in the hands of remaining directors/shareholders to purchase a deceased's shares. This ensures funds are available when required, and the original company vision remains unchallenged.
Partnership protection is very similar to director/shareholder protection. If a partner of a business dies, there may be other problems. Apart from the potential dip in the company's profits, it may be necessary to buy out their partnership interest from the deceased's family, who again, perhaps do not share the same vision of the company's future. Such unforeseen events can lead to crises, reduced revenues and in some cases business collapse.
Both partnership and director/shareholder protection should be arranged under an appropriate trust from inception and in conjunction with an appropriate partnership agreement. The partners or directors will invariably be of different ages and therefore the costs of funding the term policies will vary. The differences can be equalised by the partners or directors making payments between themselves. This ensures each partner or director contributes to the total cost in proportion to what benefits they are likely to receive under the arrangement, ensuring there is no element of bounty. This is known as premium equalisation.
It is important that commerciality is maintained if there is a disparity in the amounts of the premiums paid by each partner or shareholder. It could be argued that the arrangement is not commercial, thereby jeopardising Inheritance Tax effectiveness.
The partners or directors should also consider putting in place a cross-option agreement to protect any business property relief the partnership's assets or shares attract.
Business loan protection provides a lump sum that enables a business loan to be repaid in the event of the death or serious illness of a specified life. A company may wish to cover a business loan against the death or serious illness of an individual, this could be the owner or director of the company or a key individual who has a direct impact on profits.
Some lenders insist on this type of cover being in place as a condition of the business loan.
Although business loan protection is fairly well established, the other elements of business protection are still being overlooked. So why are advisers in the UK not getting involved in this market and offering business protection to their clients?
Possible reasons include clients not realising they need the cover; business protection being lower on the priority list for many clients - after protecting buildings, equipment and machinery; larger adviser organisations being unclear whether business protection should be part of corporate financial planning or personal financial planning; advisers not being confident about proactively selling business protection to key high net worth clients; and lastly, advisers' recent concerns about some providers' service standards, as poor service can undermine the relationship between adviser and client.
To deal with these issues, providers should raise the profile of business protection in the market. They should also be more proactive in identifying new clients as well as taking advantage of opportunities for new business from their existing clients.
It is important to point out that while the business protection market remains rate-sensitive, price should not be the only deciding factor. The Financial Services Authority indicates that financial strength, claims-paying history and value for money should be the most important criteria when choosing a provider. Value for money includes price but it also relates to other factors such as a provider's ability to effectively process large sums assured; medical underwriting capability; high financial underwriting limits; and product flexibility and future options.
When considering a provider, its ability to provide specialist sales units that deal with business protection enquiries and access to underwriting helplines should be investigated.
Life assurance alone does not cover all the needs of business owners anymore, although the majority of business is still written with death-only benefits. Critical illness and total and permanent disability on a first-event basis are now included in products.
Income protection is also increasingly important as a part of the financial planning process for businesses. This benefit can be used to pay for a replacement employee or cover the loss of profits where an employee is out of action.
One area where providers can help in the advice process is to offer assistance on technical issues. Providers realise that advisers need more support when dealing with complex legal and technical agreements, so most of them are now on hand to offer it. Many also have specialist taxation and trust areas, and are working with marketing teams to develop material that covers these issues. Sample letters to HM Revenue and Customs and draft agreements are often available, along with information on how to use them.
There are more GP reports and medical evidence requests for larger sums assured under business protection, but some providers have been trying to make their underwriting systems more efficient. Providers often review their financial underwriting limits and these can be high enough that there is no requirement at all.
When tackling this issue with clients it is a good idea to focus on the fact that it is better for everyone if the underwriting requirements meet the needs of the individual - so if it can be made easier, it will be.
If advisers have access to underwriters they should take advantage, as underwriters can pgive practical information on how best to present financial evidence and package a business protection case, which can help make the financial underwriting process easier and quicker.
Examples of this advice include:
n If financial evidence is not needed, do not send it.
n Always look how best you can package the case.
n If an individual is key, what makes them key?
n What is driving the cover? If it is protection of investors or loans then give details such as the type, source, term and nature of the funding.
n How has the sum assured been calculated?
n Check the automatic financial evidence limits - is anything needed?
n Is the case unusual in any way? If yes, then what makes it unusual? Give underwriters the information needed to help them understand what is different about your application.
Unfortunately, business protection in the UK is an element of financial planning that is regularly overlooked. The repercussions of not considering this type of protection can be devastating and advisers owe it to their clients to properly investigate their protection needs.
Alun Beynon is head of protection at Aegon Scottish Equitable
