All insurance is about replacing the mitigating the impact of large, or even potentially catastrophic financial losses by sacrificing comparatively much smaller, known regular payments – in other words, premiums. While some insurances – such as employer’s liability and motor – are compulsory by law, most companies have to make their own decisions about the insurance cover they need. Any buildings, their contents, stock, machinery and IT kit are all obvious candidates for cover, as are potential legal liabilities that a business might face, which can be covered by public liability and professional indemnity policies. What often gets omitted from consideration, though, is that most crucial element of any business – the people.
What are the risks?
In small businesses, this is particularly vital. Business owners need to consider not only the impact on their families should they fall seriously ill, or even die, but also the impact on the business itself. There aren’t many big outfits that would run into major problems if one of their many employees was unable to work, but that’s far from the case at the other end of the scale. If a sole trader couldn’t work the business would probably cease to exist, so how would he or she (and their family) manage financially? If there is more than one person in a business, the absence of one of them raises not only these questions but also how their absence will impact on the others.
All of these risks can be covered through various forms of insurance, which can be set up to pay out in the event of the death, suffering a critical illness, prolonged sickness absence(through ‘income protection’ products) or permutations of all three. Benefits can be paid to either the individuals being covered, their families or the business, according to the need. When benefits are paid to the business, this is known as ‘key person cover’ and insurance companies will want to see that the amounts of cover requested are proportionate in broad terms to the financial losses expected, so be ready to have accounts or projections available. Typically, insurance companies will accept amounts that relateto turnover or profits (or projections of these, in the case of start-ups).
An attractive option for SMEs
While sole traders are limited to taking out cover as individuals, once there is more than one person involved, policies taken out on a group basis can offer significant advantages. Individual policies are priced in such a way that the premiums stay constant throughout the term of the policy, which means that for at least half of the policy duration the premiums are higher than the true cost of cover. Group policies are priced up one year at a time, so start out significantly cheaper. As the group covered get older the premiums increase to reflect this but, at younger ages, the increases are very modest year on year. In addition, most companies will at some point see older people retiring to be replaced by younger ones needing cover, so the overall cost to the business will be brought back down.The other advantage of pricing year by year is that companies can adjust the cover as their needs change over time.
Another key advantage of group policies is that the cover is often far more straightforward to put in place. Most insurance companies will provide a level of cover – known as the ‘automatic acceptance’or ‘free cover’ limit – thatrequires no medical questionnaires to be completed, so long as all the plan’s members are covered on the same basis (for example, the cover for all members is the same flat amount or, more often, the same multiple of their salaries). The more people covered in the group, the higher the automatic acceptance limits tend to be, so it’s often worthwhile extending cover to all of a company’s employees. This then serves the additional purpose of providing staff with valuable cover, ensuring they and their families have at least some basic cover in place. For many people, the death and disability benefits provided through their employment are a significant part – often even all – of their protection against personal catastrophe.
Death in service benefits in particular are very inexpensive to provide and are, of course, tax deductible making them cheaper still. Note that benefits should be set up under a trust and approved by HMRC to ensure the favourable tax status. Most of the leading insurers offer a Master Trust facility, administered by professional trustees, usually free of charge. These facilities are well worth considering as they take the responsibilities of acting as trustees – which can actually become quite onerous – off the shoulders off the business owners.
Ask an expert
Although the principles behind these group covers are relatively simple, finding and setting up the right cover, on the right basis, for your company is really best done by an independent expert in the field. Find an intermediary regulated by the Financial Conduct Authority, either through personal recommendation, through any trade body you belong to or, failing these, through websites such as www.unbiased.co.uk. An independent adviser will check the market for you and find the deal that’s best for your business.
John Ritchie, Chief Executive Officer of Ellipse has worked in the group risk sector for over 20 years. Ellipse is a group risk insurer that makes use of available technology to deliver a high quality service at a competitive price. You can find out more at www.ellipse.co.uk.