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.