The perfect match

A business has financial protection needs in the same way a person does. The challenge for the adviser in the business protection market is one of scale and application, finding the right products for a business' specific needs.

Key person insurance is the purest form of business protection ' a life assurance policy applied to cover the cost of the loss of a key person to a business. The loss of that person, however, can have different implications for a business depending on the individual nature and set-up of that business. The loss of the key employee will inevitably mean costs in finding a replacement. Beyond that, it could lead to a loss of profits and create problems for the continued existence of the business if that key employee is also a major shareholder. Lenders may also want to pull in loans. All these eventualities need to be assessed by the adviser, to build the most appropriate and comprehensive protection package for the business.

Key person insurance can be written on a term or whole of life basis. Term assurance would be appropriate if it can be estimated how long that person will be key to the business, for example, to retirement age, or for the length of their contract. Whole of life assurance is more appropriate where the time limit of an employee's importance to the business is not so clear. Take the case of a founding company member whose name in the industry is such that their death would unnerve the market and impact on the public confidence in the company.

Critical illness (CI) insurance has an obvious place to provide cover when a key employee does not die but is unable to work. For example, if a key person suffers a heart attack and survives, but is not fit to work, possibly ever again. The assessment the adviser must help the company make, is the immediate impact on a business of a key employee's absence. If this person is a company's top salesperson, for example, with extensive contacts crucial to the success of the business, their absence could lead to a dramatic fall in sales.

Covering debts

Loan protection and shareholder protection are additional applications of term and whole of life assurance and/or critical illness or income protection insurance, which can be applied as adjuncts to key life on an employee. Shareholder protection will be appropriate to a shareholder not necessarily actively working in the company.

A loan may have been granted to a company, based on the activities of a particular employee. Loan protection insurance will therefore need to be applied to that employee's life, if there is a risk of the lender withdrawing funds on that employees' death or absence from the business. Given that a loan will usually have a specific repayment period, term assurance or CI would enable the loan to be repaid straightaway. Alternatively, income protection would cover regular loan repayments. The most appropriate form of cover will ultimately depend on the particulars of lending dictated by the lender.

Meanwhile, shareholder protection will enable the shares of a key shareholder to be bought by the company on the shareholder's death. The last thing a business needs is for shares to fall into the hands of a dependant who does not have the same interest in the company as the shareholders. Equally, the cash value of those shares may be more important to that dependant than the shareholding interest in the company.

Shareholder protection can be applied in a variety of ways. For example, giving the shareholder the option to sell the shares back to the company, or giving the company the option to buy those shares. Alternatively, it could give dependents the option to sell the shares back to the company and/or committing the existing shareholders or partners to buy and the shareholder's beneficiaries to sell.

Taxing times

For every type of insurance applied for key person and business protection reasons, the tax implications will vary. While the tax implications should not affect the appropriateness of cover, they will need to be taken into consideration for corporation tax purposes.

It is clear that the concept of business protection is simple, just as pensions are. Any complexity lies in the application, which is as variable as the individuals, the businesses and the structure of those businesses that need cover. It is this that can make the market daunting to advisers.

'There is a lot of reluctance on the part of IFAs to enter the key person market,' says Lynda Cox, senior manager, life and investment marketing at Skandia Life. 'With business protection you are dealing with a lot of people to secure an agreement. There is the managing director and the finance director for example, who will question if this is a sensible expense. And the key people themselves, are they insurable?

'There are other professional advisers like accountants and solicitors to consider and this creates an opportunity for the IFA to create relationships with them. The advantage of this is that it strengthens the position of the IFA, as it can take time to explain the benefits and workings of key person protection to a client. However, if the IFA has the solicitor or accountant on side that job is much easier.'

Mike Haughton, protection product development manager at Royal Sun Alliance, agrees that there is a great deal of liaison work involved.

'There is a lot of work for the IFA to do,' says Haughton. 'The adviser needs to have a good understanding of the business ' the company, the sum assured, solicitors and so on. But this way, the adviser can create the whole picture for the insurer not just snippets of information and this is very valuable.'

Haughton adds that the real value of the IFA is knowing the insurer who can place cover quickly and also those who can deal with large sums assured.

Finding the best insurer for your client can, however, be a case of trial and error. Paul Evans, partner at Arlington Financial, says: 'Our selection of insurance companies will be based not just on premium cost, but on flexibility of underwriting and good cover. We are constantly updating our perception of insurance companies.'

Evans was unimpressed when re-insuring a recently underwritten case. The case involved different partners who used different insurance companies. While one company was prepared to re-insure by letter, the other insisted on a whole new form filling process.

Evans applies objective and subjective analysis when making his selection. Objective analysis comes from The Research Department's Aequos database, to which he will then apply his own subjective view based on his experience of dealing with a provider.

'No life insurance company would admit that its underwriting was poor, but I would suggest from experience that some are,' he says.

Evans admits that the key person market can be hard enough after 10 years, let alone for an adviser just starting. However, he cites a recent case his firm has just completed for £12m life cover with £6m worth of CI cover.

'Those amounts were new for us,' he says. 'Only when dealing with these cases, for example, do you get re-insurers involved. But you learn through experience. Next time we will know straightaway what to do.'

The bottom line is that the real difference between the individual and the business protection market is one of scale. 'The logic is that £200k worth of sum assured is worth 10 times more than a £20k case,' says Evans. 'The inconvenience is similar, the underwriting may be tighter, but would you rather do 10 times the work for the same amount of money. Of course you wouldn't.'