There’s a lot of talk about how SME insurance can be expensive.
But look at it this way:
On top of everything else an SME has to pay every month, any cost looks expensive.
You get to become ruthless with costs when you are running a business, so expenses which aren’t strictly necessary simply have to go – and this means insurance can get overlooked.
Big mistake. SME insurance protects against surprises in the future that can, out of nowhere, turn your business inside out. Insurance is a necessity – not least because it protects against events (like staff getting very ill) to which there is no other practical response at a time when the business could go under.
Below Holborn Assets Wealth Manager Sam Ebbs answers 10 key questions that an SME should be asking in order to face the future with confidence; if your SME hasn’t got answers to these questions – or doesn’t believe it needs them – you might do well to be talking to Sam in the future:
What happens if one of our key individuals / owner(s) dies?
Can we keep the SME together?
Can we get illness cover for absolutely ages?
How flexible is “key man” insurance cover?
Does “key man” cover stay with the key man, or with the SME?
Do policy costs rise with the age of the insured individual / owner?
What about insuring new individuals / owners?
What if we want to scrap any insurance?
How often do we have to pay premiums?
What about insurance and Trusts?
Question #1: what happens if one of our key individuals/ owners dies?
What would be the financial implications to the company of losing one (or more) of our key personnel either to illness or death?
For example: Would there be any short term loss in cash flow?
Are there any loans to banks that would need to be serviced?
Are there key client accounts that could be lost in the event of losing this key person in the business?
This is a question to which the answer will always depend on the individual circumstances of the SME – but the financial implications of losing key personnel are generally always bad without adequate insurance measures in place.
Question #2: can we keep the SME together?
Do we have enough capital in reserve to provide the family of the deceased Partner with a monetary amount equal to their share in the business?
If the answer is no here, then action can be taken and protection put in place – and it’s not that expensive.
Question #3: can we get illness cover for absolutely ages?
Can insurance arrangements be put in place to cover illness where the partner or key person(s) may be off work for an extended period of time?
Critical Illness cover can be put in place to protect the business if this event was to occur.
Question #4: how flexible is “key man” insurance cover?
Can cover be increased once it is in force?
Yes absolutely, the cover should be increased as the business grows and the profit attributable to the “key” person being insured increases. Insurance cover is specifically designed to grow as a business grows.
Question #5: does “key man” cover stay with the key man, or with the SME?
If a Partner leaves the business, can they take the policy with them and transfer it to an individual policy?
This would depend on the internal legal framework of the company but, in principle, this can be done.
Question #6: do policy costs rise with the age of the insured individual / owner?
Will the cost of cover and protection increase year on year as the individuals insured get older?
No, for protection against death of a Partner or Key person this can be set up on a Level Term basis, meaning that once the cover is in force, the premiums will remain constant for the term of the policy. The term of the policy is defined at outset by the Partners / business.
The benefit here is that, the protection is based on age and state of health at the time of setting the policy up. For a Level Term protection policy, the younger you are when you start the policy the cheaper it is.
Question #7: what about insuring new individuals /owners?
Can new policies be added when a new partner joins or when a new key person joins?
Absolutely – the business would just take out a new protection policy on the new Partner or Key Person based on the value of their ownership in the company or their value to the business.
Question #8: what if we want to scrap any insurance?
Can a policy be cancelled once in force?
If a Partner decides to leave the company the policy can be cancelled if required and the premiums stopped.
Question #9: how often do we have to pay premiums?
How are the premiums paid for the protection policy?
They can be made monthly or annually by the company; this is purely a matter of choice for the company – whatever works best from a cash flow perspective.
Question #10: what about insurance and Trusts?
Can the policies be placed into a Trust?
The protection policies can be placed into a Trust – which can be an extremely useful tool to use for UK Inheritance Tax planning.
The irony about SME Insurance, says Sam Ebbs, Wealth Manager at Holborn Assets, is that “Business owners would wake up in the morning and have breakfast in their home that they have insurance on to protect against something happening to the contents or the home itself. They would then jump in their car and drive to work in a car that has insurance on in case the worst was to happen. i.e. The financial implications of an accident would be taken care of by the insurance company.
They then arrive at their place of work, which ultimately provides the financial means to support the home, car and family life, but haven’t got the right protection in place for in the event something unforeseen was to happen that would have significant negative impact on the company going forward. ie the SME. Business insurance gets overlooked, when the whole domestic picture depends on business continuity. This can easily be resolved.”