In sickness and wealth

SMEs can face serious problems if key staff fall ill or die. Business protection is not as complicated as you might think - and providers are more than happy to help you through the process, says Edmund Tirbutt

The fact that the business protection arena has played host to a number of new product launches and other innovations during recent months is as good an indication as any of the potential that it is considered to have by insurers. Indeed, Swiss Re estimates that the failure of the majority of SMEs to have sufficient protection in place has resulted in a £500 billion business protection gap.

Yet intermediaries can be reluctant to get involved due to the mistaken belief that business protection is likely to prove too complex to handle. The life assurance, critical illness cover and income protection products involved are broadly similar to those used for writing individual protection, but the sums assured tend to be higher and the policy terms shorter.

A further difference is that policy pay-outs go towards the business or towards the repayment of a loan or overdraft rather than to the insured individual or their estate. Keyperson cover can provide a business with a cash injection in the event of a key employee dying or becoming too ill to make a contribution, and partnership or shareholder protection cover can safeguard against a sick or deceased partner or director’s share of the business passing to an unsuitable dependent.

Writing such covers may involve the use of trusts and other legal agreements and there are a number of important tax considerations that need to be born in mind.

Alison Turner- Holmes, head of marketing at Scottish Provident, says “An unexpected tax liability on policy proceeds could mean that there are insufficient funds to meet the client’s needs, so advisers must consider all aspects of taxation that may apply. For example, will any premiums be allowable for tax purposes and will the proceeds be subject to tax in the hands of the business on a claim?

“At outset, consideration should be given to having the proceeds paid in instalments, since this can help reduce corporation tax liabilities. If policies are to be owned personally, for example, for shareholder protection purposes, and written into trust, advisers need to be aware of any tax implications on payment of the premiums. If a limited company pays the premiums there could be benefit in kind implications for directors and if the premiums are paid personally they should be equalised to avoid any Inheritance Tax issues. Furthermore, a Pre Owned Asset Tax charge can also be imposed in some limited circumstances.”

But the good news is that most taxation and other technical questions can be relayed to business protection insurers, who pride themselves on being able to hold intermediaries’ hands every step of the way via formidable technical support teams. “Many advisers seem reluctant to dip their toe in the water, viewing business protection as a specialist market. But we can help advisers develop their business to ensure their clients are sold the right protection,” says Jerry Bayman, national partnership manager for business protection at Bright Grey.

Another perceived downside of dealing in business protection is the idea that cases frequently fall through as a result of taking much longer to complete than in the individual market. But there are steps that advisers can take to speed up the process.

Mark Meads, head of business protection sales at Aegon Scottish Equitable, says “It can be a bit of a myth that business protection is very complicated and very slow, and a lot of pain can be removed from the process by suitable preparation from the IFA and by managing the expectations of the client. It’s important that clients know there is a need for financial underwriting and therefore bring information like details of their income and company accounts to the meeting.

“They also need to know what medical information is likely to be relevant. For example, if they are taking medication, what is it and why are they taking it? It should be stressed that attending medicals promptly can avoid delays, and it is important that application forms are completed with as much information as possible to enable quick decisions. One in five business protection applications are currently completed incorrectly, so double checking from the advisers can save a lot of time. “

Established business protection insurers already include Legal & General, Norwich Union, Aegon Scottish Equitable, Scottish Provident, Skandia Life, Liverpool Victoria, Zurich Assurance and Royal Liver. But this February the field expanded further with new launches from Bright Grey and from Friends Provident. These new players have broken fresh ground by having underwriters and customer care teams that are dedicated entirely to business protection.

Bright Grey is also noteworthy for having added free to its business protection products the RED ARC service and a Working Transition package, which sources temporary replacements for employers that lose key employees. Additionally, Working Transitions performs free background work for securing permanent replacements – although the employer has to pay the actual headhunter’s fee – and offers a legal advice service, which can be particularly useful for issues relating to employment law and share succession.

Unum’s launch of Dual Benefit Group Income Protection this February added another useful option to the business protection field – which offers fewer options for income protection than it does for life assurance and critical illness cover. Although essentially a short-term group risk product for businesses with between 3 and 99 staff, the fact that it includes significant pay-outs for employers as well as employees means that it also has serious claims to being considered a business protection tool.

In the event of a claim, Dual Benefit Group Income Protection enables the employer to receive an automatic monthly Business Benefit, which provides them with additional finance to manage the long-term absence of an employee. It can, for example, be used to help an employer finance the temporary replacement of staff or carry out reasonable adjustments to the workplace in order to facilitate the return of a disabled employee.

Wojciech Dochan, head of commercial marketing at Unum, says “It could certainly be used instead of keyperson income protection cover from a risk mitigation perspective. The cover period can be for between one and five years and, because deferred periods can be as short as four or eight weeks, the employer is provided with access to rehabilitation facilities for sick or disabled employees from a much earlier stage than is formally available on standard group income protection.”

Innovation has also been forthcoming from the established business protection players. This March Aegon Scottish Equitable rolled out its Online Business Protection Toolkit to the entire market, after having made it available to existing IFAs in late 2007. This provides an impressively comprehensive A-Z of how to trade in business protection, covering everything from how to fill in forms to identifying and approaching clients and developing professional connections. (See www.businessprotection.aegonse.

Zurich Assurance is also working on an exciting adviser tool which it hopes to have available by this May to facilitate the processing of business. This will provide a range of cover options after gathering a lot of facts via a technological format that ensures that appropriate questions follow on from one another. It should save time for advisers already competent in the market and give confidence to those not yet involved by making them realise that it’s not too hard.

Once this innovation materialises, who could rule out someone coming up with an industry-wide quotation portal for business protection? But there is certainly no need for IFAs looking to become active in the field to wait for such a development to occur. The insurer support already available ensures that any IFA willing to show the necessary commitment should prove equal to the task. n

A mess that could have been prevented
Penny O’Nions, principal of The Onion Group, an IFA based in Iver in Buckinghamshire, was recently approached to “help sort out the mess” for a company that had not been given suitable business protection advice at outset. She was able to provide both financial advice and – through partnerships she has with solicitors and barristers – legal advice.

A property developer had formed a partnership with a builder and had made his own wife company secretary – without giving her any shares in the business. But the property developer died in 2003 and, although both surviving parties wanted the builder to take the business over, he didn’t have the necessary funds available.

Eventually, after four years, the builder managed to arrange a suitable loan to make the purchase possible, but only after the situation had caused considerable stress and anguish. Because they couldn’t afford to employ a professional valuer, there were huge arguments about what the business was worth, and the builder’s marriage broke up under the strain.

O’Nions says “If these had been my clients in the first place, I would definitely have sold them a portfolio of protection in order to cover the needs to sell the business and to pay for professional fees. A simple partnership assurance contract could have prevented the problems from arising and keyperson assurance cover on the wife would have been a useful safeguard as well because she was acting as the company secretary. “

In a nutshell

  • Most SMEs do not have suitable business protection cover.
  • The field is not too complex for IFAs with no experience.
  • Insurers offer formidable technical support teams to hold IFAs’ hands.
  • There are many steps IFAs can take to speed up the application process.
  • Bright Grey and Friends Provident entered the marked this February.

    Wojciech Dochan: Mitigate risk In a nutshell