To understand and describe:
1. Understanding the different types of business protection that are available.
2. The needs of different business entities.
3. Understanding some of the tools that are available to you to help develop your sales.
Tutors on the panel are:
Richard Kateley, Head of Specialist Protection Legal & General
Stuart Halliwell, Market Development Manager, Legal & General
PRESENTER: Welcome to this business protection session hosted by Legal & General. Well today we’re going to be looking at what exactly business protection is and what the opportunities are for advisers who may want to develop this marketplace and what support there is for you. This introduction session is the first of a three part training programme on business protection. You will also find a detailed session on both director and partner share protection, and key person protection.
Well we’re joined now by Richard Kateley and Stuart Halliwell, who run the dedicated specialist protection team at Legal & General and who are specialists in business protection. So, Richard, if I can start with you and maybe ask a very basic question, what exactly is business protection?
RICHARD KATELEY: Well our industry loves to make things more complicated than they need to be, and in reality, when we’re talking about business protection, all we’re really talking about are three simple things. We’re talking about protecting the profit, the debt and the ownership of a business, and to do that we’re using term and/or a critical illness policy, and in some situations a trust form to cover these risks.
When we’re talking about profit protection, we’re really talking about key man protection or key person protection. That’s someone whose loss would dramatically affect the profits of the business whether that’s directly or indirectly. We’re trying to give the business breathing space should something happen to a key individual, so the business don’t need to make any rash or rush decisions. Sometimes the challenge with this is getting the company to understand who the key people are. It’s not always that clear-cut.
For example, if you take a sole trading adviser with a paraplanner, if the paraplanner was to die or have a diagnosis of a critical illness and was unable to work for any period of time, the adviser would have to do all his own admin and therefore see less clients, resulting in fewer sales. So although the paraplanner was not directly responsible for the profits, without them the profits and indeed the business would suffer. We talked about this more in the video we do about key person protection within this series.
Then we move on to debt, and here we’re talking about any debt the company has, whether that’s a formal bank loan, director loan account or even a mortgage on the business premises to credit cards and overdrafts. You would have thought this one is probably more common sense. As it would be with our domestic clients, you wouldn’t expect a client to take out a mortgage without protecting the debt, and why would a business owner not protect the debt which could effectively wreck their business if anything was to happen.
But, however, you’d be surprised how many people don’t have the cover and I believe this is mainly down to advice or shall I say lack of it. In our research, it’s been shown that over half the time when businesses are talking to their banks about loans, the banks don’t give any advice about protection. If we then add to that fact that less than half of the SMEs in the UK questioned have a financial adviser, it’s no wonder that some small businesses are carrying around unprotected debt.
And then finally we’re talking about ownership, and here we’re talking about limited companies or partnerships, and what we’re trying to do here is that if the business owner was to die or be diagnosed with a critical illness, what we’re trying to do is give the company the time to make sure that the business stays in the right hands and we’re creating a guaranteed marketplace for the shares, so both the beneficiaries and the company get fair value for those shares in an easy and pre-agreed process.
Again, in our research, we found that almost six out of ten small businesses have no cover to cover this risk, and what’s even more surprising I’ve found is that business owners we spoke to 66% of them either have no will or don’t mention their shares in their will. This situation could lead both the company and beneficiaries in an awful mess if the worst was to happen to them, and it can all be avoided with a little bit of forward-thinking and most importantly, in my opinion, some professional financial advice. And again, with the business ownership, we talk about this much more in depth in our director and partner share protection video within this series.
PRESENTER: And then finally?
RICHARD KATELEY: And then finally we’re talking about the new kid in the block, which is in the guise of relevant life plan. It’s not really a true business protection policy, but it is hugely important and now outsells the other three types put together. Relevant life plan provides personal cover for an employee or directors of the business. It’s a life-only contract and the business pays premiums with any proceeds being paid to the life assured beneficiaries who are normally the spouse or member of the family or indeed they can nominate a charity. The attraction of relevant life plan is that they’re highly tax efficient and can work out up to 50% cheaper than Standard Life cover if the employee or director was to pay it out of their net income. And we’ll discuss this a bit further later on in the session.
As I said, we like to keep things simple and fundamentally all we’re talking about here is term assurance policies and for some situations a trust form. However, it is also easy to get it very wrong. For me, the biggest fundamental different between family protection and business protection is that for family protection putting policies in trust benefit from all the tax efficiencies and speed of payment that all advisers know about; however, with some business protection situations, the policies may not work or at least not do what we want them to do unless we put them into trust. This is why business protection for me anyway still is very much an advised sale and not something that businesses can do without advice.
PRESENTER: Well, okay, Richard, so it sounds to me like it should be a vital part of any business’s disaster recovery plan, but in your research you have highlighted that many businesses don’t have any cover, so why do you think that is?
RICHARD KATELEY: I think it fundamentally comes down to the fact that lack of knowledge, not only about the risks, which some businesses do understand from our research, but equally that there are solutions out there in terms of protection. For me, this is the main opportunity for advisers. When we’ve talked to business owners who have some form of business protection, the vast majority - in fact I think it’s just short of 90% - did so because they were advised to do by a professional adviser. Very much like domestic insurance, death and serious illnesses and its implications are not common topics of conversation around the board table, but it should be along with what would happen if the building burns down or the computer crashes.
As you say, it should form part of any business disaster recovery plan. Let’s face it if a computer or a building can be replaced or rebuilt, some as not always the case for a key person or a business owner if they were to die. And to be fair this lack of knowledge and awareness is not just limited to business owners, as their accountants are equally in the dark about many forms of business protection and the risks thereof. The opportunity for me here for advisers I believe is huge. Again, referring back to our research, almost 82% of SMEs have an account compared to only 49% who have a financial adviser. And when asked, the vast majority of the business owners said that they would want to hear about business protection from either their accountant or their financial adviser, as opposed to their bank networks or even us, the insurance companies.
PRESENTER: So is there resistance to the protection cover?
RICHARD KATELEY: I think quite the contrary actually. The fact the top three answers given by business owners why they don’t have it, was that they didn’t see the need for it, they’ve never really thought about it or nobody’s advised them that they should have it. Now none of those in my mind would say that there are barriers to having protection.
And talking to business owners, in my opinion, is no different than talking to our domestic clients. It’s all about cash flow underpinning everything else, and rather than talking about household bills and mortgages, it’s payroll, office overheads and ownership, which are the key blocks which need to be supported if something goes wrong.
PRESENTER: Well, Stuart, if I can turn to you now, businesses are all different to each other, but what are the main differences between say a sole trader and a partnership or a limited company?
STUART HALLIWELL: You’re right, the needs of a partnership are very different to that of a sole trader and you need a very different approach to each. If you look at a sole trader, which is the simplest business entity, the business is inseparable from the individual who owns it and has no separate legal identity. They are bound by ordinary and civil law in their commercial undertakings, meaning that they carry personal responsibility for all the debts and obligations of the business. In the context of business protection, any policies put in place here will be done on a personal basis with the sole trader himself as the policy owner. So if you took out a key person protection on an employee, he would simply take out the policy on a life of another basis. Equally, if he wanted to cover any loans or debts, he will just take an out of policy on his own life.
If you then take a partnership, which is purely a relationship between persons carrying on a business, with a traditional English partnership, they’re considered separate entities for accounting purposes, but not separate entities for legal purposes. This means that like a sole trader partners can be held personally accountable for any legal or financial commitments the business has. In addition, joint and several liability means that one partner could also be held accountable for the relevant misdeeds of another.
This means that like sole traders partners can be held personally accountable for any legal or financial commitments the business has. In addition joint and several liability means that one partner could also be held accountable for the relevant misdeeds of another. This also means that just like sole traders any policies put in place here would be done on a personal basis with one of the partners as the owner, but put in trust for all the partners in the partnership. In addition, you would also look at protecting the ownership of the business with partnership share protection.
Then limited liability partnerships, known as LLPs, differ again as they do have a distinct separate legal identity to that of their owners and do not have the joint and severable liability. As the LLP has a distinct separate legal identity to that of its members, it can own life assurance policies in its own right, just the same as limited companies do. Again, here, key person protection for the profits or the debt and of course partnership share protection could be considered to protect the ownership.
Finally, we come to limited companies that have a separate legal identity to its owners who are known as shareholders. It is responsible in its own right for everything it does and its finances are separate to the shareholder’s personal finances. In common with LLPs, a limited company can own insurance policies in its own right. Here you would be looking at key person protection, director share protection to protect the ownership and of course relevant life plans. If you want to look into this in more detail I would suggest you watch the shareholder or key person videos that form part of this series.
PRESENTER: So, Stuart, are there any tips you can offer advisers who are trying to break into this market?
STUART HALLIWELL: I think there are lots of things that advisers can do to put themselves in front of business owners; however, if they do not currently have any appropriate existing clients, then it’s going to be a bit more of a challenge. If an adviser has a significant existing client bank, then clearly that could provide a number of warm leads. If you’ve ever done any commercial mortgages, commercial general insurance, group pensions, group life, then pulling together a business protection proposition and getting back in touch with those clients should really be fairly simple. More and more advisers are getting involved in auto-enrolment, and that’s clearly a complementary market for business protection. Segmenting your client bank allows you to identify where you may already have dealt with executives or owners of a business.
So what areas should you look for? Well, have you dealt with their residential or commercial mortgages for the directors or business owners? Have you arranged family protection for directors or business owners? Or also have you dealt with the partners of a business for family protection or mortgage protection or looking at pension arrangements or investments? Do you have any links to general insurance brokers who arrange commercial property insurance or public liability insurance? Do you have any high income or asset rich clients? If you’ve discussed the personal financial plans of business clients you’ve already dealt with the decision makers.
By adding business protection to your advice service to those clients you could benefit from a potential lucrative opportunity to increase your revenue, and when you meet decision makers away from work they tend to be more approachable. Although they may not want to talk business in an informal environment, it’s a great opportunity to start building a relationship with them. Explain that you may have something to offer that would require you to meet and discuss it in more detail. Again make sure you follow up with a phone call, getting past the gatekeeper will be easier if they’ve asked you to call them to arrange a time.
PRESENTER: So what about network events and seminars are they a good route in?
STUART HALLIWELL: Seminars can be a great way in to get into potential clients. Getting them all together in one place and getting your message across to a larger number of people. Planning is the key to a successful seminar, of course, and of course getting the clients to attend a seminar can be a challenge. We have a range of seminar planning guides on our website to help you in this area. Business clubs and business networking events, such as the British Chamber of Commerce, Institute of Directors, Federation of Small Businesses, can be a usual source of leads, and offer a chance to talk to other businesses that you can then work with in the future. Interestingly, in our recent research, a quarter of business owners said that this was how they met their current financial adviser for their business.
PRESENTER: And how about professional connections?
STUART HALLIWELL: There are many different organisations that advisers could look to work with in the future, and the obvious ones for business protection are accountants and solicitors. They provide the professional services to many small businesses and as such will have just the type of client database that could help to establish an adviser in business protection. However, as well as trying to establish reciprocal arrangements with any accountants or solicitors, advisers should also consider the other organisations who may have a client bank who would benefit from your services. For instance, is there an outsourced HR company in your area, or a commercial insurance broker, or an outsourced payroll company, or even looking at a health and safety consultant, all of these potentially have a client bank of SMEs that would really benefit from your expertise.
In addition, you are not just gaining access to their clients you’re also safeguarding the future of their business. The last thing they want is for one of their clients to fail.
PRESENTER: So what preparation should advisers complete before they visit a business?
STUART HALLIWELL: Research is crucial before any first meeting. Any information you can gather before you see them will allow you to have an interactive conversation about their business and give confidence to the clients that you understand what they do. It can demonstrate that you are professional. One of the starting points for any research will be a simple internet search of the company and the directors, which can give you useful insight into the business you may want to see. Many businesses will have details regarding their background and the directors will often give a brief biography of their past experience, which is a very valuable insight into the business. In addition, some companies will even go as far as to publish their business results. Again, giving far more insight into the actual business and giving the adviser some indication of the potential sums assured that may be required.
PRESENTER: Well all of that is useful background, but what other information should an adviser obtain to get a real in-depth view of the company and the cover that it might need?
STUART HALLIWELL: They could look at Companies House. All limited companies, plcs, limited liability partnerships have to make an annual return, which is available online at Companies House. These are a great source of information to help you sell business protection. There are many other providers of this information and some enable you to view the high level of details for no cost; for example duedil.co.uk as in due diligence and companycheck.co.uk. Of course, there are other providers and some will charge fees for reports and analysis of company figures. Understanding a profit and loss statement can help you identify sales opportunities within a business.
The information contained in these can help you to understand how much share protection may be required, what level of key person may be needed for the business, how much business loan cover is required, and also how the directors, shareholders are taking their income. By using accounts, you are also building in an automatic review for the future. You can download their next set of accounts and identify any changes within the business, such as an increase in profit, increase in loans, which all gives you further opportunities in the future. Companies House could prove to be valuable in helping you to look after your new clients and understand their needs before you meet them.
I would also say a company’s articles of association are a valuable source of understanding the structure of their shareholding in the business and what could happen to any shares on the death of a shareholder. From our own research, we know that many business owners do not review these on a regular basis. And by reviewing them you will be well prepared to discuss the benefits of any share protection arrangements.
PRESENTER: So any advice on how advisers should approach new business clients?
RICHARD KATELEY: For me, business owners are no different than our domestic clients; they simply have different needs and objectives. Our existing skills should serve us well with a commercial client bank as they will with a personal client bank. It’s worth remembering that sometimes corporate clients can be a little be more sophisticated maybe than our individual clients, so your approach will require careful consideration in these situations. Interestingly, in our recent research we’ve carried out, we asked company owners who did not have any personal or business adviser about how they would like to be contacted or if indeed they would like to be contacted by a financial adviser, and almost 60% said they would welcome it.
The question then, I guess, comes to is how best to do it and the results I found quite interesting. The least popular way, which I guess is fairly obvious, is cold calling and only about 5% businesses said they would welcome that as an approach. The top three were either by letter or email, introduction by their accountant or solicitor, as Stuart said earlier, or introduced by a social or business network. Of those businesses that had an adviser, they either approach the adviser themselves or are introduced to them by their solicitor or accountant. There wasn’t much evidence of advisers approaching companies directly and maybe this is where the shortfall in advice is coming from.
PRESENTER: And in your research, did you talk to advisers about how they got into the market?
RICHARD KATELEY: Yes, we did. We felt that was very important. And we interviewed a selection of advisers who had been in the business protection market for a while and asked them how they did it, and the general feeling was it was an uphill struggle to be honest. The issues were not necessarily around the complexities of the product or even pushback from the business owners, but much more around their own confidence, getting the right introductions and the lack of customer and professional connections, awareness of the need for the business protection.
The overwhelming feedback was to get business owner’s attention, the approach and the material has to be clear, concise and simple for them to understand. And I guess that we have stuff to learn ourselves in that. In 2013 research that we carried out, we focussed on the business protection gap being £1.35trillion. But this means nothing to somebody running an engineering business in Bradford, for example. The business needs to be made aware of what effect losing one of their key engineers would have on their bottom line or how the death of a fellow business owner could put terminal pressure on their businesses. And what they could do to protect themselves, because I think that’s one of the things that advisers can help with.
As with most things in life it comes down to communication and simple advice, I guess. There’s no magic wand and there is a huge lack of awareness within the SME community. But to be fair that’s no different to our domestic market. We don’t tend to sit around the dining room table and discuss what would happen if one of the family members were to die or diagnosed with a critical illness, and the board table is no different. And in fact with some family businesses they tend to be the same table. It does us good sometimes to face our own mortality and put some plans in place for it.
PRESENTER: And advisers should highlight this with business owners?
RICHARD KATELEY: I think so, without a doubt. One of the simplest questions we can ask is how long would your business survive without you or without your best salesman or without your production manager. Before the adviser asks those questions most people probably haven’t considered what would happen. And even if they felt that their businesses would survive without that key person, we can start to discuss with them about the replacement costs and the profits that they could lose by not having that person.
Replacing a key person can be harder and much more costly that business owners realise. And a report by Oxford Economics released last year highlighted that on average it cost just over £30,000 to recruit a new employee. And that figure is just taking the costs of recruitment, the cost of absorbing them into the business and finally getting them up to speed. It doesn’t include the far greater potential costs of things like revenue and loss of expertise. The report also highlighted that on average it takes 28 weeks to get a new person up to optimum productivity.
PRESENTER: We are out of time, so a final question for both of you, what would you say is the best door opener into this market for an adviser who’s watching and thinking they’d like to develop in this area? Stuart, if I could come to you first.
STUART HALLIWELL: I think for me it’s all around knowing your client and having the confidence to go and highlight the risks that they may be running and getting the business owners to fully understand them. In this market, as we’ve already discussed, there is a huge amount of information you can gather on your potential clients before you actually go and see them. From their websites to their articles of association, in many instances you could have a far better knowledge of their business than they will. I would first approach any existing domestic clients that I knew owned a business. I would put together a simple dossier containing a set of their most recent accounts and a copy of their company articles of association.
I would also highlight the areas of risk I believe that they are running in both and put a simple covering letter saying that I’d noticed that they have a commercial concern and thought they may be interested in a free high level assessment of their business. I would also highlight the areas of risk I believe that they are running in both, and put a simple covering letter saying that I had noticed they have a commercial concern and felt they may be interested in a free high level assessment of their business. I’d highlight some areas of risk that they are running, which they might not have considered, or that there are ways of mitigating or at least reducing these to a greater extent. If they would like to discuss these further then please contact me. I’m not sure that there are many business owners who would not want to discuss this further.
PRESENTER: And, Richard, what do you think say from a product perspective?
RICHARD KATELEY: Certainly agree with what Stuart had to say, but if we’re looking purely from a product level there’s no doubt that relevant life plan is the product which can open up the rest of the business protection market for many advisers. It’s in a slightly different stable to the rest of business protection suite, because as I mentioned at the start the benefits are paid to the life assured’s beneficiaries and not the company, or fellow business owners as it is with the rest of business protection. So it really is a family protection policy. But we and most other providers group it together with business protection due to the fact that the company takes it out on the employee like a group life scheme but on an individual basis, and in fact it is effectively a single death in service scheme.
At this point it’s probably worth me going into this a bit more detail and give you some more understanding about what a relevant life plan. So a relevant life plan is a tax efficient way for businesses to provide life cover benefits for its employees on an individual basis rather than through a group scheme. It’s designed to provide a payment on death and would be paid by the company as part of the employee’s benefits package giving the employee and their family a bit of peace of mind. It is simply an individual term assurance policy providing life cover in the event of death or diagnosis of a terminal illness of an employee during their employment within the length of the plan to the maximum age of 75.
There are certain rules which apply to all relevant life plans which are laid down by the HMRC. Firstly, the plan must be a single life. It must provide death benefits. It can include terminal illness cover during service, but cannot include things like disability benefits, critical illness cover or any other benefits such as waiver. The plan cannot go beyond the individual’s 75th birthday and there can be no cash value to the plan. A relevant life plan must also be written under trust and the benefits must be left to either an individual or a charity. Its purposes are to provide protection for the family and as such the level of cover would be based on a multiple of their remuneration. Of course remuneration, which can include in this circumstance salary, but also dividends, bonuses and any other P11D benefits that the employee may get. The key point to consider is that the employee’s benefit provided should be reasonable for the role that that employee does. And finally the main purpose of the plan should not be for tax avoidance, but it can be very tax efficient.
We then need to consider and understand who is eligible for a relevant life plan, and there has to be to start with an employee-employer relationship, and this does include shareholders who are considered for relevant life plan as employees. Also salary partners, as this is merely an honorific title for senior employees within certain firms. Those that can’t have a relevant life plan are sole traders, equity partners and members of limited liability partnerships, but importantly their employees are eligible to have a relevant life plan.
So how does the plan work? It’s fairly simple. As I said at the very start of this, the company takes out the policy on the life of an employee. The policy is put into the relevant life trust. If the employee were to die, the trustees make a claim and if successful the benefits are paid to the trust who will then pay the benefits onto the individual or charity as nominated by the life assured, so all very nice and simple. And then I guess we need to understand why it’s so tax efficient.
Well an individual who is covered with a relevant life plan does not face the same tax consequences as if the employer simply pay the premiums of an ordinary life policy for him and her; a relevant life plan does not cause income tax liability or National Insurance liability for the individual on the employer paying the premium, for example. Also as an RLP is not a registered pension scheme, the premiums and indeed the benefit do not count towards the individual’s pension allowances. Meaning that for high earning individuals especially those allowances can be used to accumulate pension benefits elsewhere. And finally because a benefit is written under trust, there should not be any liability for inheritance tax on the policy proceeds for the individual’s beneficiaries.
So let’s have a look at those potential tax advantages and consider an example of the possible cost savings. If an individual were paying their own life assurance cover, they would be doing that from their net income. Therefore the employee would have paid income tax and national insurance contributions on their salary. In addition, their employer would have paid employers’ national insurance contributions. While the employer would have potentially received corporation tax relief, the effect of the taxes will make the cost of the cover much more than having a relevant life plan. The alternative is for the business to take out a relevant life plan on the individual.
So let’s look at how this would differ. As you can see, the annual premium to the insurance company remains the same; however, the plan is not treated as a benefit in kind, so there is no liability to national insurance contributions or income tax for the employee or the employer. And as the premiums may well be an allowable expense for business purposes, they can claim relief against their corporation tax bill. In this example that would save the business a considerable amount of money.
So who would find RLP attractive? Well starting directors wanting life cover written in a more tax efficient manner would be the first port of call. Businesses with a small number of employees who are not eligible for a group scheme; key individuals who should be rewarded with an extra benefit; death in service schemes where typically benefits are based on multiples of salary only and typically four times, whereas our relevant life plan product is based on up to 25 times the client’s remuneration depending on their age; higher earning individuals, they may have pension liquidity problems, whereas RLP is not counted towards their lifetime allowance, so that could be a good opportunity; and finally professional connections.
It’s a great tool for approaching and working with accountants, as they will find the tax benefits extremely attractive for their clients. It’s an ideal way for financial advisers to introduce the subject of life protection to businesses and this could really lead to many opportunities, including business protection. To demonstrate this and to try to bring relevant life plan to life a little bit, we worked with an adviser called John Hogg at Porterhouse Associates who had some excellent successes with this product, and for me his thoughts and comments and that of his client, Martin Mulligan, really demonstrate the benefits and the opportunities in this marketplace. Not only did Martin take John’s advice and take out a relevant life plan, but he also went on to promote it to his own key accounts generating more leads for John.
PRESENTER: Well, plenty to think about there, Richard, thank you for that. So finally what support can Legal & General offer to advisers in this space? Stuart?
STUART HALLIWELL: We can offer plenty of support to advisers looking to explore this subject in more depth. Last year, we were proud to win best business protection provider at the Investment Life and Pensions Moneyfacts Awards. This award voted for by advisers reflects the valuable technical support offered by our specialist protection team, and our continued commitment in supporting advisers new to the business protection market. In 2014, we ran 325 seminars, workshops, webinars and training sessions, we saw over 3,500 advisers and delivered 6,500 CPD training hours, and as a team we travelled roughly 75,000 miles around the UK delivering our training.
Advisers can get in touch with our dedicated specialist protection team through their usual Legal & General contacts or via our business protection website. Our website features a range of adviser and client facing materials, technical information, useful online calculators and expert support videos. We also have video interviews with business owners who have interesting relevant stories that can be downloaded and used by advisers in their own marketing.
PRESENTER: We’ve got to leave it there, thank you very much and do please keep an eye out for the learning outcomes from this session which we are showing right now.
In order to consider the viewing of this video as structured CPD, you must complete the reflective statement to demonstrate what you’ve learned and its relevance to you. Among the topics covered in this session are understanding the different types of business protection that are available; the needs of different business entities; understanding some of the tools that are available to you to help develop your sales; how to obtain company accounts and articles of association, and how you can use these to assess the risk that businesses could be running; the importance of regularly reviewing the cover in place against the changing value of the business; and the criteria for a relevant life plan and how these policies are structured in a tax efficient manner. Please now complete your reflective statement to validate your CPD.