Research has shown that many companies fail to insure what are arguably their most valuable assets.
Most organisations probably have the company mobile phones insured and a maintenance contract on the office printer. But how about their most valuable assets - the Directors and key employees? A failure to insure ‘people assets’ can have a serious impact on a business should the worst happen, but there are cost-effective options available to cover these risks.
So if you’re a Director of a SME what should you do? There are four key areas to look at:
- Business loans (including director’s loan accounts),
- Key persons
- Shareholder protection
Many businesses may have been persuaded in the past to take out life cover on the directors when arranging loans with their bank. In many cases this cover may have not been arranged with the most competitive providers, but would almost certainly have generated handsome commissions for the bank adviser. This type of practice is no longer allowed and many banks no longer have adviser arms to provide this advice, so often a business can save money by replacing this type of cover with a more cost effective option.
Did you know that a director’s loan account is automatically repayable on death? Insuring for this means that the business will not have to cope with a potentially large unexpected bill at what is often a severely challenging time anyway.
The loss of a key person can result in both lost business and profit as well as increased costs as a replacement is sought and the key person’s duties are covered. Think of it as business interruption insurance, which is often commonly included in a commercial insurance policy if caused by a fire, theft, flood, or sometimes even power cuts. Research indicates that 40% of businesses would cease trading within a year on the death or serious illness of a key person, so if you are covering the costs of business interruption for damage to fixed capital shouldn’t you also cover it for damage to your human capital?
With Shareholder Protection it is worth asking two questions: would you want your family to receive the full benefit of your share in the business on your death, or would you want to retain full ownership of the business if one of your fellow business owners died? With regard to the first question, presumably one of the main reasons you go to work is so you and your family can enjoy the full fruits of your labour and sacrifice, so why wouldn’t you want the same if you died? With regard to the second you may have a common purpose and get on great with your fellow business owners, but can you say the same for all members of their extended family? The research indicates over 50% of owners have not addressed these issues – are you one of them?
Finally, death-in-service is often regarded as a valuable benefit to provide to employees, but as it’s based on salary it can often be of limited benefit to shareholding directors. There is a type of plan available that can provide death-in-service benefits for directors at both a high level of cover and at cost-effective premiums whilst offering major tax savings. In research, over half of the shareholding directors who had heard of this type of plan took it up, the problem is that only 28% of those surveyed had heard of it!
If you’d like to discuss any of the areas above in relation to your company, then do get in touch for an initial exploratory meeting.
Data source: L&G Business Protection – State of the Nation’s SMEs Report, March 2015.