tap into the BUsiness protection market.

Transcription

1 BUsiness protection research tap into the BUsiness protection market. Most businesses have key individuals that are essential to it s survival. In fact our research with the Institute of Directors shows that 39% of businesses could not survive more than 18 months following the death or critical illness of a key person. This brochure can help you tap into the potential of the business protection market. This is not a consumer advertisement. It is intended for professional financial advisers and should not be relied upon by private investors or any other persons.

2 contents. ForewOrd 03 OPPORTUNITIES 05 THE BUSINESSES 07 DEFINING KEY 11 CORPORATE debt 15 SHARE PROTECTION 21 IDEAL CLIENT 27 CONTACT US 29

3 Foreword BUSINESS PROTECTION 03 ForewOrd. How well protected is UK Business? We re leading the way again with more insight into how well UK businesses are protected. Our latest survey was carried out with the Institute of Directors (IoD) to understand the security of the assets, shares and cash flow of businesses. Business is all about people, and the majority have a few people who are essential to their survival. Whether it s the owners, specific employees, or major customers, without these key people any business struggles. The mood of directors who took part in the survey was upbeat, with predictions of rising profits and fears of a slide back into recession fading. But too many businesses seeking growth still don t have cover in place to protect them should the worst happen. SO WHAT S CHANGED since 2009? The 2009 research, carried out in conjunction with the British Chamber of Commerce, identified a business protection gap of 1.1 trillion. In our 2011 research we focussed on limited companies and smaller businesses so the detailed results are very different. However, the findings from the latest research suggest the protection gap remains the same. We ve seen an increase in the number of businesses that have protected against the death of a business owner and the results show that 65% of businesses surveyed are free of corporate debt.

4 04 foreword BUSINESS PROTECTION The majority of the businesses surveyed had at least one key individual. 57% of Public Limited Companies (PLCs) said they were also reliant on a small number of key people who were the main drivers of their success and profits, showing that even the bigger corporations still need protection. The good news is that the limited companies we surveyed seem to have a good understanding of business protection, with over a third having created a formal agreement to cover what would happen on the death of a business owner. For advisers looking for a target market, you won t go too far wrong with limited companies. 95% have a key person, with 33% having four or more, and over a quarter said that they could not survive for longer than six months if a key individual dies or suffers a critical illness. These businesses are positive about the future with 85% saying they were confident their profits would increase over the next five years. This latest research is really interesting and shows some significant opportunities. It s the responsibility of the protection industry to raise awareness amongst Small and Medium Enterprises (SMEs) and to make sure that their protection needs are fully met. Clare Harrop Head of SpeCIALIST protection

5 OPPORTUNITIES BUSINESS PROTECTION 05 Opportunities. Our research highlights the opportunities available in the market and provides fresh insight into the views and opinions of business owners, particularly: The agreements they have in place in the event of the death or critical illness of a director or partner. How many key individuals they have that contribute heavily to the profits of their business. How many of their key individuals are protected against death or critical illness. How long their business could survive without those key individuals. How much corporate debt they currently have. When businesses last had their company agreements reviewed. What security agreements they have to provide against their corporate debt and the consequences.

6 06 OPPORTUNITIES BUSINESS PROTECTION HighliGHts. 95% of businesses had at least one key individual 43% of businesses had unprotected corporate debt 39% of business owners expected their business to fold within 18 months of the death or critical illness of a key person A third of businesses (33%) had no Share Protection in place 58% of businesses had no formal agreement to establish what would happen in the event of the death or critical illness of a business owner 70% of businesses had not reviewed their company agreements in the last year. By understanding your clients views and perceptions of business protection, you can sell the need for protection more effectively and confidently. As with all insurance policies, limitations and exclusions apply.

7 the businesses BUSINESS PROTECTION 07 The BUsinesses. The focus of our research this time was limited companies, who accounted for 78% of responses, and those businesses that are ideal candidates for business protection. To get the opinions of businesses of all sizes, we surveyed companies with varying levels of turnover. annual turnover Annual turnover % Up to 1m 48 1m to 10m 31 11m to 50m 11 51m to 200m 3 201m to 500m 2 Over 500m 4 Don t know/not stated 1 There are currently 2.1 million businesses in the UK (defined as businesses/firms registered for PAYE and/or VAT). Source: Office of National Statistics (ONS)

8 08 the businesses BUSINESS PROTECTION Type of Business Type of BUSINess % Limited company 78 Sole trader 5 Public limited company 4 Limited liability partnership 4 Partnership 3 Non-profit organisation 3 Other 2 Don t know/not stated 1 Co-operative * * Less than 0.5% Number of BUsiness owners per organisation 35 74% of those surveyed had up to 3 business owners 30 32% 33% Percentage % % 5% 20% 1% 0 One Two Three Four Five or more Number of business owners Not stated

9 the businesses BUSINESS PROTECTION 09 Opportunity Nearly three quarters of businesses (74%) had three business owners or less. This means that each of those owners has a greater level of responsibility for the success of the business than in larger companies that have more owners. Companies with fewer business owners should consider some form of Key Person Protection. Number of employees per BUsiness 60 Percentage % % 23% 15% 4% 6% 2% Fewer than Number of employees 500 or more Don t know/ Not stated Opportunity The majority of businesses in our survey have up to ten employees. There is a high likelihood that some of these employees are key to the profits of the business and should therefore consider some form of Key Person Protection.

10 10 the businesses BUSINESS PROTECTION Average AGe of directors/partners average age % Under to to to Over 60 7 Don t know/not stated 5 These results show that 81% of directors/partners are aged 41 or over. Although premiums may be higher due to their age, they re at an increased risk and should consider having some form of business protection in place. Business protection premiums tend to be higher than personal protection due to a combination of factors, such as older clients, higher sums assured and an increased risk of death or critical illness. Opportunity Some older business owners may also be planning their exit strategy. They may want to sell their part of the business when they retire. This leads to greater opportunities as the remaining business owners may wish to buy the shares and the retiring business owner may need money to invest. Therefore, reviewing cash flow and available funds will be a priority. Owners considering retirement may also be considering their Inheritance Tax liabilities, and discussing business protection needs with a client may present an excellent opportunity to cross sell.

11 defining key BUSINESS PROTECTION 11 defining key. Regardless of the size of a business, it will generally have a few employees who are considered key. These employees are those whose skills, knowledge, experience or leadership contribute to the continuing success of the business. Key Person Protection (Profit Protection) is life assurance or life assurance and critical illness cover (if chosen) written on the life of the key person but owned by the business. This means that any money due becomes payable to the employer. The business can then use the money to, for example, replace lost profit or to cover the cost of finding and hiring a replacement for the key person.

12 12 Defining key BUSINESS PROTECTION Number of key individuals per BUsiness Percentage % % 23% 25% 14% 10% 23% 2% None One Two Three Four Five or more Number of key individuals Don t know/ Not stated Nearly three quarters (72%) of those surveyed had four key people or less. This shows how vulnerable SMEs are and how vital it is to consider having some protection in place in the event of the death or critical illness of a key individual. The loss of a key person may result in: Reduced sales. Loss of profit. Recruitment costs. Increased workloads for the remaining staff. The disruption of development plans. Key Person Protection can provide the business with a lump sum to help cover these potential costs.

13 defining key BUSINESS PROTECTION 13 Provisions for cash flow following the death or critical illness of key individuals KEY COVER % Life Cover 14% Critical Illness Cover 4% Both Life and Critical Illness Cover 25% Other 8% None 41% Don t know/not stated 8% 41% of businesses have no provisions in place to cover the loss of a key person. Our research also showed that in smaller businesses with less than ten employees, this figure was even higher at 49%. Opportunity Only a quarter of the businesses we surveyed said that they had both life and critical illness cover to protect against the loss of a key person. This means that the majority of businesses have some scope to increase their levels of protection. This is a great opportunity for advisers to target these businesses and increase their sales.

14 14 Defining key BUSINESS PROTECTION Expected length of time a BUsiness could continue AFter the death or critical illness of a key individual KEY LENGTH OF TIME % Less than three months 19% Three to six months 9% Six months to a year 7% A year to 18 months 4% 18 months to two years 1% Over two years 58% Not stated 2% 39% of businesses could not survive more than 18 months. Opportunity Partnerships and sole traders were the least confident that their business could continue trading following the loss of a key person. Over half (52%) of these businesses thought that they would fold within six months. This shows the need for Key Person Protection within smaller companies, and also presents a strong sales opportunity.

15 corporate debt BUSINESS PROTECTION 15 Corporate debt. The loss of a person who s guaranteed a loan could be incredibly serious for a business if there is no cover in place to protect the loan. Business Loan Protection is life assurance (sometimes life assurance and critical illness cover) written on the life of an individual or individuals. When a valid Business Loan Protection claim is made, a sum equal to the outstanding debt could be paid to either the business or directly to the lender. Does your BUsiness HAve any corporate debt? Yes No Don t know Percentage % % 1% 1% 4% 8% 65% 76% 61% 52% 46% 44% 46% 38% 32% 23% Total Fewer than Business size (number of employees) Only 23% of businesses with less than ten employees had any form of corporate debt. This suggests that it s more difficult for smaller businesses to gain finance due to current market conditions.

16 16 Corporate debt BUSINESS PROTECTION BREAKDOWN OF corporate debt Type of Corporate debt Average proportion Bank Loan 30 Overdraft 18 Director Loan 15 Private Investors 9 Credit Card 3 Other 12 Not specified 13 Our research into the breakdown of corporate debt also showed that: Director loans were more common in smaller businesses, averaging 30% of the overall debt. Bank loans were the main form of debt for larger businesses (around 40% of the average debt amongst businesses with 50 or more employees). Businesses with between ten and 50 employees had a higher average proportion of private investor debt than other businesses (18% compared with ten or less for other sized businesses). Opportunity It s important to understand the full debt of a company and not just bank loans. Remember, Director Loan accounts are usually repayable on death and overdrafts can be recalled at any time.

17 Corporate debt BUSINESS PROTECTION 17 Personal Guarantees Personal guarantees are often requested to give a lender more security for the risk of the finance. Providing the paperwork for these guarantees can be onerous and advice should be sought about the consequences to business owners when they have a personal guarantee in place. Do you HAve any personal GUArantees with the BAnk for your corporate debt? KEY % Yes 39% No 49% Don t know 12% Nearly two-fifths of respondents (39%) claimed there were personal guarantees associated with their bank loan. This was more likely to be the case amongst the smallest businesses with fewer than ten employees (57%). Opportunity All corporate debt should be covered, not just the bank loans but director loan accounts and overdrafts. Basic protection could save a business and the business owner s personal wealth. It would be a mistake to assume that corporate clients will have their debt covered.

18 18 Corporate debt BUSINESS PROTECTION Did the BAnk insist upon life assurance when arranging the loan? % Percentage % Never mentioned 20% Recommended to take out 14% Insisted 13% Not stated Opportunity Only 14% of businesses said that banks insisted they took out life insurance. This means that the majority of businesses may never have had their protection needs assessed, and these present a major sales opportunity for advisers.

19 corporate debt BUSINESS PROTECTION 19 Did the BAnk introduce you to a financial adviser? KEY % Yes 18% No 70% Don t know 12% 70% of businesses weren t introduced to a financial adviser. This shows that even though they discussed their protection needs with the bank they were not passed through to advisers to discuss these further.

20 20 corporate debt BUSINESS PROTECTION How is your corporate debt protected? 50 Percentage % % Life cover 22% 43% 2% 11% 12% Critical Illness Both Life Not and Critical protected Illness Type of Protection Other Don t know/ Not stated Over two-fifths of respondents (43%) claimed to have no protection for their corporate debt. This was most likely to be the case amongst businesses with employees (56%) compared with smaller businesses. One in ten respondents claimed to have life cover and 2% had critical illness only. 22% had both life and critical illness cover, the latter being most common amongst smaller businesses with fewer than 50 employees (30% employees and 33% 1-9 employees). Opportunity Only 24% of businesses had any form of critical illness cover. This highlights a high potential for critical illness sales, especially given that 74% of business owners were aged between 41 and 60. Opportunity 43% of businesses had no form of loan protection. Business Loan Protection is incredibly important, as in difficult market conditions, protecting debts may improve a business credit rating.

21 share protection BUSINESS PROTECTION 21 share protection. The death or critical illness of a business owner may destabilise the business and can quickly lead to financial difficulties. Share Protection means if the worst does happen, the remaining partners/directors/members could stay in control of the business. In the event of a business owner dying or becoming terminally or critically ill, Share Protection can provide a sum of money to the remaining business owners. This means that in the event of a valid claim, this lump sum can help enable the surviving shareholders to buy the shares from the deceased shareholder s estate, thereby maintaining control of the business.

22 22 share protection BUSINESS PROTECTION What provisions are in place to protect shares in BUsiness following the death of a BUsiness owner? % 30% Percentage % Not protected Both Life and Critical Illness 19% Life cover 8% Other 2% Critical Illness 8% Don t know/ Not stated Opportunity A third of businesses had no protection in place to cover the cost of purchasing shares should a business owner die or become critically ill. This shows there is potential to increase sales of Share Protection within the market place.

23 share protection BUSINESS PROTECTION 23 What are your expectations should a business owner die? % 30 Percentage % % % 11% 11% 9% 0 Partners/ shareholders would buy shares Business cease to trade Beneficiary takes an active role Beneficiary sells shares to third party Other Don t know/ Not stated The majority of respondents thought that if one of the business owners died, the remaining shareholders would buy the business. A fifth (20%) of respondents thought the business would cease to trade. Our research also shows that in businesses with fewer than ten employees, the likelihood of the business ceasing to trade was much higher at 39%. Limited/Limited Liability companies were the most likely to think the existing shareholders would buy the business (42%) compared with other types of company. Opportunity Have business owners had these discussions? If they wanted to retain control of the business and buy the shares, where would this money come from? How much will the shares be worth? Share Protection helps cover shareholders against the impact of the death of a shareholder and the financial affect it may have on the business.

24 24 share protection BUSINESS PROTECTION Does the BUsiness HAve a formal agreement in place to cover the death of a BUsiness owner? KEY % Yes 35% No 58% Don t know 7% 58% of businesses said that they had no formal agreement in place to cover the death of a business owner, and this was even higher amongst the smallest businesses with fewer than ten employees (73%). This is surprising considering that many business owners, when asked, would like their families to be looked after and receive the value of their share in the business upon their death.

25 share protection BUSINESS PROTECTION 25 When did you last review your Articles of Association or Partnership Agreement? Percentage % % Within last 6 months Between 6 months and a year ago 18% 18% 14% 20% 6% 9% 1-2 years ago 3-5 years ago Never Since business was started Don t know/ Not stated With any Share Protection that is set up, it s important to ensure the agreements used are aligned with the business rules as set out by their company documents ie: the articles of association/partnership agreements. This ensures there are no conflicting terms as to what will happen on the transfer of shares. Opportunity Working with solicitor firms can be a good source of referral business, especially when writing Share Protection.

26 26 share protection BUSINESS PROTECTION Thinking AHead, firstly over the next 12 months and then to the next five years, what do you think will HAppen to profit in your BUsiness? Percentage % % 85% Timescale 12 Months 5 years 20% 13% 4% 2% 2% 9% Increase Decrease Stay the same Not stated Expected profit levels Two-thirds of businesses (65%) were positive about the future, expecting profits to rise in the next 12 months and a further fifth expected them to at least remain the same. Just 13% of respondents were expecting profits to fall and these were in the mainly Co-operative/non-profit organisations and PLCs. Businesses were even more positive about the next five years, with 85% thinking profits would rise over this period and just 4% expecting them to decrease. Opportunity Working alongside corporate clients will involve annual reviews to regularly ensure their Business Protection needs are met.

27 ideal client BUSINESS PROTECTION 27 Ideal client. Our latest research focussed on limited companies and smaller businesses, with half of survey responses coming from businesses with less than ten employees. There s a common misconception that when selling business protection, you ll have to deal with large PLCs and the prospect of this can be quite daunting. However, 84% of businesses in the UK employ less than ten people. Employees per FIrm Number of companies 1 to 4 795,605 5 to 9 224, to , to 49 54, to 99 17, to 199 7, to 249 1, to 499 3, or more 2,885 Total 1,220,070 (SME stats 2009 BIS Enterprise Directorate Analytical Unit) As well as forming the largest share of the market, our latest research highlights that small businesses with up to ten employees present many opportunities to increase Business Protection sales.

28 28 ideal client BUSINESS PROTECTION Key findings Some key findings from this report about businesses with less than ten employees are: 2 3% had some form of corporate debt, yet over half (57%) had to provide personal guarantees to secure their loan. For those that have provided personal guarantees to secure their loan, not only is their business at risk should anything happen to them, but also the security of their personal assets such as their homes, cars etc. 64% of businesses weren t introduced to a financial adviser. 3 9% of businesses with less than ten employees would cease to trade if the business owner died. This is nearly double the average taken from all survey responses (20%). 4 9% of businesses with up to ten employees have no provisions for cash flow in place following the death of a key person. All of these findings demonstrate the huge potential to increase Business Protection sales. This, together with the size of the market, makes these businesses an attractive segment of the market to target.

29 Contact US BUSINESS PROTECTION 29 contact us. YOUR BUsiness protection contacts IFAs/INTermedIAries Call our Protection Sales Team on We may record and monitor calls. Call charges may vary. Monday to Friday 9am to 5pm. BUSINess Partners Call your usual Legal & General contact. BANKS ANd BUILdING societies Please speak to your usual Legal & General contact.

30 30 Contact US BUSINESS PROTECTION meet the specialist protection team. Clare Harrop Head of Specialist Protection Emma davies Market Development Manager Scott Hood Market Development Manager Marcus PrimHAK Market Development Manager Stuart Halliwell Underwriting Propositions Manager Ian Banks Channel Development Manager (Specialist Protection) Sales support. We offer a range of adviser and client facing support material full of information about the Business Protection market and our Priority Protection service. This suite of information is available online to download along with access to online calculators to assist you in the advice process and a selection of webcasts from our experts.

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32 Legal & General Assurance Society Limited. Registered in England No Legal & General Partnership Services Limited. Registered in England No Registered office: One Coleman Street, London EC2R 5AA We are authorised and regulated by the Financial Services Authority. We are members of the Association of British Insurers. W /11