Despite the evident need for and rewards of providing keyperson cover, IFAs continue to shy away fro...
Despite the evident need for and rewards of providing keyperson cover, IFAs continue to shy away from this market. Robyn Hall finds out why All your business clients, particularly those in small to medium-sized companies, have key players. But what happens if they can no longer play?
The death or serious illness of a key player can seriously damage your client's business. Not only could it lose momentum, it could lose direction and profits. Finance arrangements could crumble, customers could lose faith and your client could lose orders. Moreover, if a key business client loses a partner or a shareholder, they could lose control of the business. Which means you could lose a client. It is an old cliché but the unthinkable happens all the time. Nevertheless, it appears the last thing businesses consider is protecting against it.
Earlier this year research by Royal & SunAlliance revealed that, despite our growing reliance on technology, businesses believed it was staff who contributed most to company success. Strange, then, that while most businesses protect themselves against the loss of their computers, they do not protect against the loss of their most valued employees. Of the 300 businesses questioned, over half pointed to people as the most important factor in the running of their business and the figure leapt to more than three quarters for those in the business services sector. Just one in 10 considered technology most important. However, while some 93% of companies had building and contents insurance, just one quarter had keyperson protection and many were confused about who their key employees were.
Ronnie Martin, life and health marketing manager at Royal & SunAlliance, says that the reason many businesses do not take action on keyperson protection is because, in most instances, no one has explained it to them.
"IFAs have a great opportunity to sit down with businesses and identify the issues about who is driving that business, who the key people actually are and the risks they are taking," he says.
"If a computer breaks down, it is viewed as a crisis - even though it is only an enabler of business rather than a profit-maker in its own right.
"Businesses need help to protect the people who use computers - especially given the time they think it would take to replace those key employees. This presents an ideal opportunity for IFAs."
It is small businesses, the powerhouse of the local economy, that are living on the knife edge of financial ruin.
"This is alarming when you consider that 96% of all UK businesses employ less than 20 people - the very sector most financially vulnerable," says Martin.
Making fruitful gains
With a market that appears ripe for the picking, why are IFAs failing to harvest the fruit of keyperson protection?
When it comes to insuring a client's key members of staff, smaller IFA firms have often shied away from dealing with what can seem a large sum of money. But Linda Ind, senior underwriter for large case services at Allied Dunbar, says they should not be deterred.
"Insurance is not about buying the cheapest, it is about buying the best," she says. "A million used to be a lot of money but now the lottery creates millionaires each week. If someone is on a salary of £100,000, all they need is 10 times income and they have £1m in protection. Some IFAs are unsure about underwriting. But my message is that it is not difficult - just big."
Ind says that a large case will typically carry a lot of commission. As a result, much rides on getting it right and an IFA can become jittery about committing business to the market.
John Ravenscroft, protection marketing director at Zurich IFA Group, says the answer lies in IFAs learning about what it is they are protecting.
"Is it the actual employee or is it the loss of that person's expertise and ability? In other words, is it the cause or the effect? If it is the latter, then perhaps income protection and critical illness should be considered in addition to life cover."
Martin agrees: "We have also noted an increasing trend towards adding critical illness cover to keyperson protection. Primarily, however, IFAs should ask whether cover is being taken out to protect loans or loss of profits. If you lose an employee the immediate impact will be on your profit stream. When that happens the whole business can quickly crumble."
Ravenscroft believes there are a number of factors IFAs should consider when recommending keyperson cover, such as whether the provider is sensitive to the special needs of corporate clients.
"Take underwriting for example," he says. "If a medical is required, will the provider do their utmost to fit in with a busy business schedule? Do they offer a fast track approach, own doctor medicals and paramedics and such?
"Other issues include whether to choose guaranteed or reviewable premiums. The former are best for companies who need to know exactly what their future outgoings will be. Those with more flexibility, or who are on a limited budget to start with, may prefer reviewable premiums which will be cheaper at the outset."
Inflation protection is yet another consideration, he adds. If the plan is for a relatively short term, then inflation will have little impact. But over longer periods, the effects can be damaging. Even at 3% inflation each year, £100,000 today would decrease in real terms by over a quarter in 10 years time.
An exciting future
Ravenscroft believes the future for keyperson cover is bright, despite a so far disappointing take-up. However, he says that if employers continue to think of keyperson protection as just a matter of life cover, there is a danger that they will step closer towards financial ruin.
"I think there are parallels between the mortgage protection market of a few years ago and the keyperson market of today," he says.
"For too long mortgage protection was associated with life cover alone until the Joseph Rowntree Foundation pointed out that one in four mortgages were at risk because they were not protected against illness, accident or unemployment." Indeed, it took action from the Council of Mortgage Lenders and even Government calls for compulsory insurance to redress this.
"Just as providers and IFAs worked together to change attitudes and open opportunities afforded by more comprehensive mortgage protection, I believe we could do the same for keyperson protection," Ravenscroft says.
Clare Goodfellow, Zurich IFA Group protection marketing consultant, says IFAs should review their existing business clients to break into the keyperson market.
"Once you have got your foot in the door it becomes an easier product to sell," she explains. The bigger blue chip companies will go to larger IFAs, so you have to target smaller companies, maybe those on industrial estates. For some the risks can be tremendous - especially if they lose someone who has a lot of technical know-how. This applies equally for someone in a sales role, as the contacts and connections they have built up over a long time may also be lost," she says.
Age against experience
"In terms of age the risk probably is not as great to a younger sales person," Goodfellow says, "but if they are a high flyer type, they could be worth insuring. The more experience someone has, the more important it is to insure them."
Martin adds: "In the past there has been a tendency to think all key people are at director level. But it can be the front line staff who have a skill that needs to be protected, such as the computer programmer, or the salesman who has connections in the Far East."
The IFA needs to be informed on these issues, he says, finding out who is key to their client's business; investigating the impact of their loss and researching how it could be prevented.
It is not just the service sector IFAs should target. Manufacturing is equally, if not more, important - especially if it is a niche market like hi-tech engineering or an electronics company. However, with every product comes a cost. It is here that IFAs may fall down.
"The only barrier to entry some IFAs will face in this market will be the cost of cover involved," warns Goodfellow. "They can keep costs down by looking at cheaper alternatives. For instance, five or 10-year cover will work out a lot cheaper than cover until standard retirement age - especially when the person may move to a different company.".
"Cost is a factor," agrees Ronnie Martin, "but IFAs can hit that straight on the head as the cost of providing term assurance protection is not what it used to be, especially when taken in relation to business profit streams.
"Apart from their clients' business, the IFA is protecting their own business. If something does happen to a client's key employee, their business will not flounder and go under - and the IFA will keep hold of their client."
Choosing the right policy
"Statistics show that a healthy person stands a one in five chance of suffering a critical illness during their working life," says Ravenscroft. "This could mean that the person is only off work for a few months, but equally it could result in having to give up their job."
Keyperson critical illness cover will pay whether the person returns to work or not. Many IFAs and employers dismiss it as too costly but this need not be the case. Recent price wars have helped reduce premiums and most providers now offer different levels of cover. For a 30 year old male non-smoker, guaranteed monthly premiums for a basic combined life and critical illness policy covering the most common illnesses are as little as £18.66 for £100,000 over 10 years.
Of course, it is not just critical illnesses that prevent people from working. Stress and back problems also take their toll, so keyperson income protection may be an alternative.
After deciding which policy is required, the next step is to calculate the amount of cover needed. This is usually based on the profits of the company, either a gross or net multiple.
Most providers accept up to five times the net profit of the company averaged over the previous three years. If more than one key person needs to be insured, the net profits should be divided between the number of key people.
Tax efficiency also needs to be taken into account when deciding the sum assured. Premiums are not usually eligible for tax relief. This is particularly true when the life assured is a shareholder director. This is often the case as expenses must be wholly laid out for the purposes of the trade to be tax deductible. It depends on the views of the Inspector of Taxes, which should be sought when arranging cover.
Robyn Hall is a staff writer
