The increasing importance of business protection

29 July 2019
There’s never been a more important time for business owners to consider buying business protection. The current trend is for people to ‘go-it-alone’ establishing ‘start-ups’ or having ‘side-hustles’ to supplement their income.

pelican strollIn fact there were 5.6 million small businesses at the start of 2018 with a combined turnover of £2 trillion1. I’d estimate this figure has increased since then and while larger businesses are likely to have built succession plans, smaller businesses will be more vulnerable should they lose the services of a key person through death or a critical illness.   

In many cases losing a key person for one of these reasons can result in insolvency. There’s unlikely to be a friendly bank manager or kind relative with a cheque book waiting to help out – and that means it’s essential that these businesses take charge of the situation by putting some form of protection in place.

Unfortunately, while most businesses today make sure their assets are covered against the effects of fire, theft or flood, they spend precious little time considering how to guard against the loss of key employees. In fact, our research shows that over half (54%) of small business owners don’t currently have key person cover and 20% had never heard of it.2

Protecting equipment ahead of staff could be a mistake.

Protecting equipment ahead of staff could be a mistake. It’s the people who create the profits in a business, through their entrepreneurship, knowledge, skills and contacts.  The businesses’ assets are just a medium through which these talents are channelled. Having adequate cover ensures the business will have access to enough funds to enable it to continue trading by replacing key people and lost income, paying off creditors and repaying bank loans. It may also help protect against the effects of unknown issues that may arise.

The impact on a business and what can be done to help

The impact of losing a key member of staff can have a number of consequences depending on the nature of the business. For example, the business will have to consider how their customers are going to react. Are they likely to lose turnover through not being able to provide the same level of service? Firms will also need to think about their creditors and whether they’ll be able to maintain their credit terms if they have problems. Competitors are also likely to be attacking their client base which can cause further issues. In addition private owner-managed companies don’t have a ready market for their shares, so on death these shares will be very difficult or impossible to sell.

The first stage in ensuring a business is adequately covered is to go through an audit checklist. There are a series of questions to answer with the most prominent being what is the contribution that a particular individual makes to the gross profit of the business? If a business loses a key person it’s going to take time for them to get somebody else in and for them to start contributing to the business.  This calculation is made using the gross profit figure because it’s from this pot that a company pays its fixed costs, including rent, rates, mortgages and staff costs. It’s often a firm’s inability to meet its fixed costs that’ll put it out of business.

The first stage in ensuring a business is adequately covered is to go through an audit checklist. 

Business owners should also consider replacement costs. This will include paying recruitment agencies – who can often charge up to 30% of the salary – plus the associated costs of relocation, ‘golden hellos’ and share option buyouts.  A firm may have to bring the most suitable candidate in from another part of the country which can be expensive.

Next on the list is looking to see if the person being insured has lent his or her own cash to the business. It’s very common for Director Loan Accounts to be used as a way of providing flexible funding, but they need to be repaid on the death of the individual. Bank loans will need to be paid off – especially if there’s any personal security, such as a second charge on a residential property.

All of these potential financial needs can be protected by taking adequate amounts of key person cover.  Usually effected by the business on the life of the key employee, this will provide a cash injection allowing the business to deal with the financial effects of losing a key person.

Continuity of the ownership of the business should also be considered. Funding needs to be in place to make sure that the remaining shareholders can buy the shares off the deceased’s estate. This is important for two reasons: 

  1. Surviving business owners will want to keep control of their business without interference from the estate. This is especially important where a majority shareholder has died.
  2. It’s important that when giving up their shares the estate gets a fair market value. This can be achieved by having a funded succession strategy in place. This would usually involve a policy being effected on the life of each owner, either by themselves written under trust for the other owners or effected by the business if it is a company, with a suitable agreement to govern the sale and purchase of the shares.

The business protection opportunity

As the business landscape is changing, the importance of business protection is growing. And worryingly these small business owners know they need protection for their businesses. 

78% of small business owners believe the absence of a key employee for more than 6 months would have an impact on their business.

Research shows that 78% of small business owners believe the absence of a key employee for more than 6 months would have an impact on their business, with 1 in 3 (32%) saying that impact would be severe2.

Business protection is often perceived as complicated - but the basic principles are similar to arranging personal protection. Business owners are no different to personal clients – they simply have business needs. You may already have clients who own businesses, so the opportunities are there for you to support your clients and help protect their business.


1 - Department for Business energy and industrial strategy statistical release – business population estimates for the UK and regions 2018

2 - Royal London commissioned YouGov to conduct the research. The fieldwork took place between 21 and 31 August 2017. 732 senior decision makers in SME businesses took part in the research.



About the author

Ian Smart

Product Architect

Ian has worked in financial services since 1984 and has provided technical support and been involved in product development since 1992. He joined Royal London in 2001, initially as technical product manager for Bright Grey, before becoming head of product development & technical support for both Bright Grey and Scottish Provident and latterly product architect for Royal London.

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