Knowledge gap “could place up to 40% of Britain’s businesses in jeopardy” claims Legal & General

Research conducted by Legal & General reveals that up to 40% of businesses would cease trading within a year if a key person died or became critically ill, yet only a fraction of those businesses have taken precautions to protect themselves from the after-effects of such events

Research conducted by Legal & General reveals that up to 40% of businesses would cease trading within a year if a key person died or became critically ill, yet only a fraction of those businesses have taken precautions to protect themselves from the after-effects of such events

Research conducted by investment and insurance services company Legal & General reveals that up to 40% of businesses could cease trading within a year if a key person died or became critically ill, yet only a fraction of those businesses have taken sufficient precautions to protect themselves from such events.

Although many business owners arrange insurances to cover items such as buildings and contents, machinery, stock and vehicles etc, it’s equally the case that many don’t consider insuring what’s usually their greatest asset: the proprietors and the staff.

In addition, 57% of businesses state that they have outstanding corporate debt, but many still have no cover in place to repay it upon the loss of a key person.

The detailed Legal & General research raises some important questions:

*Why do over 50% of businesses have no insurance arrangements in place to protect against the loss of a key person?

*What would happen to the business if this scenario occurred, how significant would the impact be and could the business even continue to trade as a result?

*How will the 57% of businesses with outstanding corporate debt cope if their bank demands repayment of the loan when a key member of staff – or one of the business owners – dies?

Andrew Kilby, managing director at Armstrong Watson Financial Planning, commented: “The Legal & General research highlights some real concerns. In our experience, the present situation is primarily due to a gap in the knowledge of business owners as to what can be protected rather than any desire to overlook the problem entirely.”

Potential pitfalls “can be significant”

Director’s loan accounts also need to be repaid on the event of their death, but the Legal & General research indicates that 28% of directors surveyed were not aware of this.

In many cases, then, where would the required money come from at such a difficult time?

Will the deceased’s spouse/partner take their place, or would they look to sell to a potential third party? Perhaps most important of all, how will the surviving owners raise the capital to buy out their share?

The answers to these questions will vary, of course, depending on the business itself and its circumstances, but should the worst happen the potential pitfalls can be quite significant. Indeed, in many cases those pitfalls could threaten the very survival of the business as a whole.

Ensuring the future of a company in such situations should be an integral area of planning for business owners. That’s where professional advice is essential to make sure that the right protection is put in place.

Key Person Protection (Profit Protection) helps safeguard a business against the financial effects of death, terminal illness or critical illness of a key person during the policy term.

The loss of a key person may result in reduced sales, loss of profit/turnover, wasted time, recruitment costs and the disruption of development plans or increased workloads for the remaining members of staff.

A key person is an employee whose death or continued absence would affect the profits of the business. Key people are individuals whose skills, knowledge, experience or leadership are important to a business’ continued financial success. Examples of a key person include – but are not limited to – managing directors, sales directors, IT specialists, technicians and R&D personnel.

In essence, Key Person Protection is life assurance or life assurance and critical illness cover (if chosen) written on the life of the key person but owned by the business so that any money due becomes payable to the employer. The business pays the premiums. This applies to both Limited Companies and Limited Liability Partnerships.

In terms of the latter, the policy is written on an ‘own life’ basis and may be placed in trust for the benefit of the other partners.

About the Author
Brian Sims BA (Hons) Hon FSyI, Editor, Risk UK (Pro-Activ Publications) Beginning his career in professional journalism at The Builder Group in March 1992, Brian was appointed Editor of Security Management Today in November 2000 having spent eight years in engineering journalism across two titles: Building Services Journal and Light & Lighting. In 2005, Brian received the BSIA Chairman’s Award for Promoting The Security Industry and, a year later, the Skills for Security Special Award for an Outstanding Contribution to the Security Business Sector. In 2008, Brian was The Security Institute’s nomination for the Association of Security Consultants’ highly prestigious Imbert Prize and, in 2013, was a nominated finalist for the Institute's George van Schalkwyk Award. An Honorary Fellow of The Security Institute, Brian serves as a Judge for the BSIA’s Security Personnel of the Year Awards and the Securitas Good Customer Award. Between 2008 and 2014, Brian pioneered the use of digital media across the security sector, including webinars and Audio Shows. Brian’s actively involved in 50-plus security groups on LinkedIn and hosts the popular Risk UK Twitter site. Brian is a frequent speaker on the conference circuit. He has organised and chaired conference programmes for both IFSEC International and ASIS International and has been published in the national media. Brian was appointed Editor of Risk UK at Pro-Activ Publications in July 2014 and as Editor of The Paper (Pro-Activ Publications' dedicated business newspaper for security professionals) in September 2015. Brian was appointed Editor of Risk Xtra at Pro-Activ Publications in May 2018.

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