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Through the keyhole

Any IFA who is not already offering business protection insurance is turning their back on a lucrative market that is desperately in need of advice and guidance.

There are four-and-a-half million businesses in the UK that add up to a potential market for life cover alone worth £500bn.

Many IFAs 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.

The reality is that once you start making contacts with small businesses, there can be a snowball effect. People who run small businesses talk to each other and word of mouth is usually the best recommendation.

Like personal protection, the idea is to insure against the unexpected. When you are talking about small businesses, the unexpected can have a serious effect on the continued success of a business and the incomes of those involved. There are four forms of protection that small businesses can take out – keyperson cover, shareholder or partnership protection, sole trader business protection and business loan protection.

The starting point with 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. It could be a person who plays a pivotal role in a major project. It could be a person without whom the credit rating of the business would suffer. Solutions will depend on the person’s role but will most probably involve life insurance, critical-illness cover and/or income protection.

One of the problems that small businesses face is what happens when one of the main shareholders dies or becomes critically ill. The same situation arises with partnerships. Another member of that person’s family will often take over their stake in the business but they may have little knowledge of or interest in the business. They may sell out to a competitor or force the business to be wound up so they can get hold of their money.

By enabling the business to receive 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 whoever has inherited.

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 because partners, directors or shareholders are likely to be of various 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, known as premium equalisation.

However, it is also vital that commerciality is maintained. If it could be argued that the arrangement is not commercial, it would jeopardise its effectiveness for inheritance tax.

Those involved might also want to put in place a cross-option agreement to safeguard any property relief that 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 and the business will cease to function without them.

Once again, the solutions are the very ones that any IFA advising on personal protection is aware of – life protection, critical-illness cover and income protection.

Business loan protection is probably the best known and most used 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 if a keyperson, such as the owner or one of the directors, contracts a critical illness or dies.

Most IFAs who already advise about protection could easily add business protection as an extra string to their bow but there are a few complex legal and technical agreements involved that IFAs need to get to grips with.

That is where providers can lend a helping hand. Many now have specialist taxation and trust areas which can provide help such as sample letters to HM Revenue & Customs and draft agreements with explanations on how to use them.

IFAs should consider a number of factors when choosing a provider. Financial strength, claims paying history and factors such as the ability to process a big sum assured are important. Medical underwriting capability, financial underwriting limits, product flexibility and future options should also play an important part in choosing a provider.

Underwriting require-ments vary from provider to provider but they often mean the need for GP reports and medical evidence requests for the bigger sums assured under business protection. This can be seen by some clients as too much of a hurdle.

Seeking out the right provider may help because there are no extra medical check requirements for some limits. 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.

There is a world of business protection waiting out there and any IFA can grab a share.

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