Why key person cover is more important than ever

At the end of 2022, nearly 13,000 British companies had shut up shop, according to the Office for National Statistics.

Meanwhile, a study by Towergate Insurance in February this year suggested 57 per cent of small business owners expected to close or sell-up due to soaring inflationary pressures.

Amid all this, company directors are working out where to make cost savings, whether this is through reducing unnecessary travel, introducing hiring freezes or trimming other costs from the budget.

One area that has come onto people's cost-cutting radar recently is insurance. 

Any company who bins their key person cover has not got their priorities right.

Neil Liversidge, WRPFS

In the personal space, FTAdviser has previously warned over consumers reducing vital protection in order to balance their household budgets.

In a corporate space, company directors may feel they, too, can cut back on their own cover and that of their employees.

But as the advisers in this CPD feature all agree: don't. 

Even though budgets may be stretched, it is imperative that the key decision-makers in your clients' and your own businesses are covered.

How to protect your clients (and yourselves)

When it comes to key person protection, senior decision-makers need to be able to cover their personal income needs in the event of being unable to work, and to fairly compensate both their family and the remaining stakeholders in the event of their death or inability to work in that role. 

There are various tools in the adviser's kit that can help their self-employed and small corporate clients (and their own businesses), without straying into the realm of general insurance (such as advising on business interruption insurance or employer liability cover).

What financial advisers can talk to their clients about as part of offering a holistic service include:

• Business loan protection.
• Share protection.
• Key person replacement or profit protection.
• Relevant life plan.
• Employee ownership trusts.

An employee-ownership trust, in essence, is a trust that enables a company to become owned by its employees, and is something FTAdviser has covered in previous articles around succession planning for advice business owners.

An EOT can be set up by a company’s existing owners, perhaps as part of their exit or succession planning strategy, or by founders starting a new business that they wish to be employee-owned.

It was created by the Finance Act 2014, to encourage more companies to become employee owned. 

Shareholder protection is also useful to consider. 

On the death of a shareholder, the remaining shareholders may want to retain control of the company to protect profits.

Long-tail business, such as liability claims, will be more affected by wage and healthcare inflation in the long term.

2022 Swiss Re Sigma report

In the absence of share protection arrangements, shares may pass to the deceased shareholder’s family by will or intestacy.