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Planning for the unexpected

IFAs who do not offer business protection insurance are turning their back on a lucrative market and one desperately in need of advice and guidance.

With around 4.7 million businesses in the UK, that adds up to a potential market for life cover alone worth an eye-popping £500bn in sums assured.

In many instances, advisers themselves run small businesses or are part of one. They know the problems as well as the solutions but are reluctant to get involved because they think business protection is too technical or time-intensive.

But once you start making contacts with small businesses, there can be a snowball effect. People who run small businesses talk to one another and, as we all know, word of mouth is usually the best recommendation.

Like personal protection, the idea is to insure against the unexpected. However, when you are talking about small businesses, the unexpected can have a serious effect on continued success and on the incomes of those involved.

There are four types of business protection on offer to ensure companies can keep trading in unexpected situations – keyperson insurance, director shareholder protection, partnership protection and business loan protection.

With keyperson insurance, the starting point is to identify anyone in the business who has a direct effect on turnover or profit. That may be someone responsible for selling or whose contacts help sales, or it could be a person who plays a pivotal role in a major project. It could even be a person without whom the credit rating of the business would suffer. The business director will generally know who these people are.

Solutions depend on the exact role of the person identified but will most likely involve life protection, critical-illness cover and/or income protection. Not that much different from personal protection then.

One of the big problems small businesses face is what happens when one of the main shareholders becomes critically ill or dies. The same situation arises with partnerships as well.

Another member of that person’s family often takes over their stake in the business. However, they may have little knowledge or interest which can become a stumbling block for future development or even for just keeping the business going.

In a worst-case scenario, they may sell out to a competitor or simply force the business to be wound up so they can get their money back.

By ensuring the business receives a cash sum if a main shareholder or partner becomes seriously ill or dies, you are ensuring the business has the money to buy out the person who has inherited it.

It is important that this protection is arranged under an appropriate trust and with a suitable agreement to determine exactly what does happen in these circumstances. This will need reviewing on a regular basis.

Care needs to be taken as partners, directors or shareholders can be different ages and the costs of funding the policies have to be arranged so each is contributing in proportion to what they are likely to receive as benefit. This is known as premium equalisation.

But it is also vital that commerciality is maintained. If it could be argued that the arrangement is not commercial then it would jeopardise inheritance tax effectiveness. 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.

Business loan protection is probably the best known and most frequently used element of business protection because it is often a condition of the loan in the first place. It provides a lump sum, meaning the business loan can be repaid should a keyperson, such as the owner or one of the directors, become ill 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 but there are some complex legal and technical agreements are involved.

This is where providers can lend a helping hand. Many now have specialist taxation and trust areas which can provide help, with practical help often available, including, sample letters to HM Revenue & Customs and draft agreements, along with inform- ation 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.

Underwriting requirements vary from provider to provider and they often mean that GP reports and medical evidence are needed for the bigger 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 are no extra medical check requirements. If there are, it may be worth pointing out that it is in everyone’s best interests for the policy and terms to be tailored to the individual.

The important thing to remember is that there is a world of business protection waiting out there.

Any adviser can grab a share, whether they see it as an extension to personal protection or just want to expand their own business using their existing contacts who are involved with small businesses.

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