As more and more waves of advisers are beginning to focus their attention on selling business protection products, Jerry Bayman explains how to capitalise on the offering.
The attraction of the business protection market for providers is three-fold. Firstly, the ability to reduce market risk by widening the business base is attractive. Secondly, the higher premiums generated by larger sums assured and the older ages that typify this market, should lead to more profitable business. And thirdly, there is a business protection gap, which presents a huge opportunity for advisers and providers to grow this area of the market.
For years there has been a perennial call that business protection is undersold. It is interesting to consider why this is the case.
One of the reasons is undoubtedly the seeming complexity and adherent risk. Getting it wrong could have unfortunate repercussions, particularly with regard to taxation at the time of claim. Advising business clients on how key person payments will be taxed is an interesting exercise in crystal-ball gazing, as Her Majesty's Revenue and Customs tends to play with a double-sided coin. Setting up partnership or share protection assurance as part of a business-succession strategy also has to be handled correctly as mistakes can have expensive Inheritance Tax (IHT) and Capital Gains Tax consequences. So it is little wonder that advisers may be wary of this market.
The question still remains about whether this is a market that should only be dealt with by specialists. The easy response would be to say yes, but how do people become specialists if they never attempt something?
The danger of emphasising the potential tripwires is that people are frightened off. So take reassurance in the fact that the rules of the game can be learnt fairly quickly and they rarely change. In fact, apart from some of the knock-on effects of trust and tax legislation, there have not been any major changes for a long time. Advisers who are keeping up with pensions legislation will know what an advantage that can be.
Advisers need not be accountants, but to advise on key person issues a basic understanding of trading, capital income and expenditure would be an advantage, as would knowledge of different business types.
To be able to discuss business-succession cover (in other words partnership assurance and share protection) it would be useful to know what they may expect to see in a partnership agreement and a company's articles of association. Hopefully all protection advisers have a working knowledge of life assurance trusts, so it should not be a big step to know why a business trust differs, and some IHT knowledge will help them understand some of the issues around the various agreements.
For advisers looking to learn more, any good bookshop will have books on business structure and taxation. The Chartered Insurance Institute study Guide to AF2 Business Financial Planning is also useful. Training is also available from the Personal Finance Society and some specialist providers.
Obviously advisers will need to have access to business clients, so those with professional introducers are already on the first step of the ladder. Accountants can be encouraged to include business protection as part of the audit checklist, while solicitors can use the creation of partnership agreements and memorandum and articles of association to discuss how the succession clauses are to be funded.
A typical partnership agreement, for instance, may dictate that, on death, the value of the deceased partner's share will be paid out to the estate over three years, for example. But this totally ignores the practical issue of how they are going to raise this cash at a time when they have just lost a key partner.
Likewise, in the articles, most companies will have a clause that ensures the remaining shareholders have first refusal to buy the shares of a deceased shareholder, and at what value. However, without the necessary cash to buy them the solicitor may as well have saved some ink and not bothered.
Keeping control
The dangers of this lack of funding can be serious. The remaining business owners run the risk of losing control of their business, the beneficiaries of the deceased owner may not get a fair value for the business assets, expensive and acrimonious litigation can follow if an agreement cannot be reached.
Often it takes something to happen for people to realise the dangers a business faces. For example, a 75% shareholding director may die. If there is no cash to buy out their share, their spouse may be forced to get involved with the business to earn some remuneration.
Business owners must make sure to check that key person policies are in place as part of their annual review. Ask them if they have a "substitute's bench" in the event of the loss of a key person, and do not be surprised if they do not. Advisers should get hold of the articles of association or partnership agreement so they can audit the succession strategies as above, and should not be afraid to ask business owners how they are funded.
They should check that borrowings have been covered and must not forget any director or partner loan accounts. Many small companies will have these and they can be substantial. The problem is they may become immediately repayable to the estate on death so they need to be covered just as the bank loan is.
Business protection can be a very lucrative market for advisers. Sums assured and premiums are generally high and produce multi-sales. A four-director or shareholder company can produce four key person life and critical illness policies plus the equivalent share protection cover. Key person and executive income cover may well feature, and, generally, the ages tend to be in the 35 to 50 range generating correspondingly-higher earnings.
For fee-based advisers, businesses will usually be quite prepared to pay for the professional work ensuring their continued survival as a business should the worst happen.
Historically, the business market has been undersold. But as the industry gets more professional, there is evidence that this tide is turning. The fact that more protection providers are now focusing on this market will certainly give impetus to it. And perhaps the timing could not be better, given that the thriving mortgage market is slowing down, so the key driver of many protection sales is under threat.
Advisers must appreciate that they owe their clients an overall duty of care, not just on what they advise but also on what they do not.
Ignoring a business's protection needs is not really an option. Not only does it put the client at risk but it could also be argued that it puts the adviser at risk as the world of financial services becomes increasingly litigious. n
Jerry Bayman is national partnership manager for business protection at
Bright Grey
