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Cover the key hole

Zurich Financial Services protection development manager Gerry Warner says PTA might be the topic of the day but business protection is the sector where advisers really should be concentrating efforts

As those involved in the manufacture and distribution of protection eagerly await the release of sales data for the first few months of the pension term regime, the burning question is – will pension term assurance close the protection gap?

It will undoubtedly help, but it is unlikely to be the saviour that some might be hoping for. But there is one market segment which offers tremendous potential in terms of bridging the protection gap – business protection.

It is almost impossible to calibrate actual business protection sales but every survey over the past few years, including Swiss Re’s Insurance Report, suggests that the gap here is massive.

This is surprising, given that, as an industry, insurers are in regular contact with the key decision-makers in the thousands of businesses in the UK, arranging everything from company pension schemes to insurance cover for equipment and machinery.

What are the other areas which are perhaps being neglected and which might have a dramatic effect on the viability of the business?

One of the vital aspects of business protection is keyperson cover, which covers businesses against loss of profits following the unexpected illness or death of a key employee, typically someone whose importance to the business is often underestimated.

Losing a top salesperson when it is least expected and unplanned, can be devastating for a business of any size, more so for the small to medium enterprise. It can take time and money to find a suitable replacement. Production may have to stop, new deals left uncompleted, loans might be difficult to obtain. A business could easily close quickly if the funds are not in place to support it through those difficult early months.

If the keyperson cover is not suitable for the business in question, it may be worth considering whether protection is needed for the shareholders.

Let us consider a situation where a business is owned by a number of shareholders and one dies without any continuity planning.

The shares may be inherited by a spouse who does not have the experience to add any real value to the business, resulting in possible turmoil, disruption or potential damage to that business. The spouse could have trouble selling the shares for a fair price or could even sell them to a competitor.

It is far better to have plans to ensure the remaining shareholders have the right to buy the deceased’s shares with funds going to the spouse, ensuring minimal disruption to the business.

However with careful planning, some legal documentation in the form of cross-option agreements and a number of term insurances written in trust will ensure the business is protected.

If the other areas of business protection are underdeveloped due to a lack of recognition, at least the same cannot be said of commercial lending. Businesses exist and expand with the support of the UK’s major lenders but every bit of lending will be accompanied by the need for life cover, albeit the bit-part player in a more major transaction. But, without it, the funds may not be released.

That is the briefest of summaries of the main elements of the business protection market. Each is worthy of an article in its own right. It appears reasonably straightforward and yet many advisers seem to be less keen, or less well equipped, to address the needs of a community of around 3.5 million businesses in the UK – or do they lack sufficient support from the provider community?

Let us begin by taking a look at the typical customer profile. Older clients, although not exclusively so, with the resulting potential for more complex medical histories, are typically allied to more hectic lifestyles. High net worth, busy, hugely important, probably with a wide range of financial products being managed within their portfolio.

Is it worth talking to them about term protection or whole of life needs when this might inevitably mean some onerous underwriting, medical exams, legal and trust issues?

Do we avoid raising these issues because the process will be long and cumbersome, with the customer relationship at risk?

The protection market has seen a gradual move towards electronic enablement for commodity products with more automated underwriting, those providers active in the large-case market generally understand the service issues associated with high-net-worth clients.

They will provide access to real, expert underwriters before the sale in order to establish full requirements at the start and set the right customer expectations.

Underwriting requirements, both medical and financial, will be set at the outset and all possible efforts will be made to minimise disruption to the client, including, for example, own-doctor medicals, the use of mobile doctors, or exams carried out at a place of the client’s choice.

There is also good access to technical and legal support, easing the way through typically complex trust and taxation issues. There is a wealth of quality literature and case studies available whilst sales support is always accessible, along with constant updates on market developments.

In short, there is life after pensions, investments, and commodity term, although it need not be so disconnected. The client who has a managed pension scheme will have business protection needs which inevitably flow into inheritance tax mitigation issues when the business is sold.

It is a holistic solution which is required to ensure the business is fully protected. Older clients, big sums assured – and good advice – result in big premiums, sustainable commissions – and a complete client solution.

Yes, pension term brings great opportunities but right now there are even better opportunities to close the gap and further the cause of the advice versus no advice as well as providing that holistic solution.

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