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The key to protection

Recent research commissioned by Legal & General into attitudes towards business protection among small and medium-sized enterprises shows that 42 per cent of companies which do not have cover do not even know what it is.

On the one hand, we could take this as an indication of poor communication by our industry of the advantages of business protection products.

On the other hand, this simply highlights the extensive opportunities that exist to raise the subject with decisionmakers in the SME business world. These opportunities are re-enforced by the way in which those businesspeople holding business protection cover of any type describe the value they believe this brings to their business.

Stability and continuity are quoted as the main benefits by 62 per cent followed by security and peace of mind protection. We should, therefore, be confident while not complacent, that our current business protection products do indeed fit the needs of today&#39s businesses.

Clear opportunities exist in keyperson protection. The ability of an adviser to position keyperson protection to a partner or director in a business to enable them to retain control of their own business, should the worst happen to one of their co-directors or partners, surely deserves serious attention.

Most partners and shareholding directors, if asked to consider the prospect of someone with no knowledge or hands-on experience joining their business in the event of death or serious illness of a key person, are likely to immediately appreciate the issues.

They will quickly recognise that it is highly unlikely that a husband or wife of an existing partner/director would be capable of stepping into the role. In some instances, their presence could have a detrimental impact on the business and in a significant number of others, they would not hold the professional qualifications to even be seriously considered.

A structured business protection plan can allay these concerns. Such a plan, while ensuring fair value for a deceased partner or director&#39s family, would also provide a framework for the ensuing business.

First, capital in the hands of the remaining partners and directors to purchase the dec-eased partner/directors shareholding.

Second, tax efficiency, for the individual partners and shareholders as well as for the remaining family. Third, flexibility to cater for future change, for example, if new partners or directors join the organisation.

These benefits can all be delivered as part of a structured partnership/directors share protection agreement.

This would involve each partner/director effecting a life/critical-illness policy on their own life written in trust for the surviving partners/ directors. A cross(or double) option agreement (single-option agreement for critical -illness benefits) would provide the basis for the share purchase and details how that purchase could be made.

A cross-option agreement gives the surviving partners/ directors an option to buy the partner/director&#39s shares and the personal representatives of the deceased have a matching option to sell. Being an “option” for the parties to the agreement it is therefore not a binding contract for sale. As a result this is tax efficient through the preservation of business property relief for inheritance tax.

It can then be a straightforward matter to deal with additional partners/directors who may come on board in the future as these new individuals enter into the agreement by completing a supplementary agreement and effecting the appropriate life/critical-illness policy under trust.

If we look at a typical small company with four shareholding directors: John, aged 52, Simon, 45, Louise, 35, and Rachel, 28. Assuming all are in average health, the chance of one dying within the next 10 years is around 15 per cent or one in seven. Your successful business clients, who are generally used to looking at ways to reduce risk to their business, will welcome guidance that allows them to retain control.

The vast majority of those questioned who had cover confirmed that the impetus to put in place their protection arrangements had come from their adviser. The research results confirm that advisers are in pole position to deliver valuable business protection advice to today&#39s small to medium-sized organisations.

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