If ever there was a reason to think about business protection, the recent news that Steve Jobs is taking indefinite medical leave from Apple is one.
While we wish Steve Jobs a speedy recovery, events such as this focus the mind and highlight the need for businesses to consider how they would carry on if a key person is unable to carry out their role due to ill health.
There are four main types of business protection: keyperson cover, shareholder or partnership protection, sole trader business protection and business loan protection.
The starting point for keyperson cover is to identify anyone in the business who has a direct effect on turnover or profit. That can be someone responsible for selling or whose contacts help sales, or a person who plays a pivotal role in a major project.
Solutions depend on the role of the key person but will likely involve life protection, critical-illness cover and/or income protection.
One of the big problems small businesses face is what happens when one of the main shareholders either dies or becomes critically ill. The same situation also arises with partnerships.
Another member of that person’s family often takes over their stake in the business. However, if they have little knowledge or interest in the business, this can be a stumbling block for future development or even for just keeping the business going. In a worstcase scenario, they may sell out to a competitor or simply force the business to be wound up so they can get their money back.
But by ensuring the business receives a cash sum if a main shareholder or partner becomes seriously ill or dies, you ensure the business has the money to buy out whoever has inherited.
Of course, it is important this protection is arranged under an appropriate trust and with a suitable agreement to determine exactly what does happen in such circumstances. This will need reviewing on a regular basis.
Care must to be taken because partners, directors or shareholders are likely to be of various ages and the costs of funding the policies have to be arranged so that each contributes in proportion to what they are likely to receive as benefit. This is known as premium equalisation.
It is vital that commerciality is maintained. If it can be argued the arrangement is not commercial then it would jeopardise the effectiveness of inheritance tax. In addition, those involved might want to put a cross-option agreement in place to safeguard any property relief the partnership assets or shares attract.
Sole traders are even more vulnerable. They do not have the usual employment securities such as sick pay or death-in-service benefits, which means the business is likely to collapse with a major financial effect on them or their families.
Again, the solutions are familiar to any IFA advising on personal protection: life protection, critical illness cover and income protection.
Business loan protection is probably the best known and most utilised element of business protection because it is often a condition of the loan in the first place. It provides a lump sum so the business loan can be repaid should a key person – such as the owner or one of the directors – contract a critical illness or die.
All this shows that most IFAs who already advise about protection could easily add business protection as an extra string to their bow. However, it cannot be denied that some complex legal and technical agreements are involved.
This is where providers can lend a helping hand and many now have specialist taxation and trust areas. Sample letters to HM Revenue & Customs and draft agreements are often available along with information on how to use them.
Businessmen will want value for money but as the FSA has made clear, value is more than just the price. Financial strength, claim-paying history and factors such as the ability to process a large sum-assured case efficiently, medical underwriting capability, financial underwriting limits, product flexibility and future options should also play an important part in choosing a provider. Although underwriting requirements vary from provider to provider, they often mean the need for GP reports and medical evidence requests for the larger sums assured under business protection. This can be seen by some clients as too much of a hurdle.
Again, seeking out the right provider may help because some limits are high enough that there is often no requirement for extra medical checks.