Could you get by without insurance?

13th February 2023

At a glance

  • To understand if your business could get by without certain types of insurance, it’s first important to be aware of the risks to the company if the worst should happen to you, a co-founder or another key person.
  • There are five main types of business insurance that offer protection in the event of the death or incapacitation of an owner or founder, including shareholder protection and key person cover. These plans are typically long term with fewer price swings, so you’re less able to shop around as you might for, say, car insurance in your personal life.
  • Before cutting insurance, remember why you took it out in the first place. Cancelling a plan to save money may be counter-productive, as it could be more expensive to repurchase later on.

Rising costs are hitting many SMEs hard. With early-stage businesses urgently seeking savings to protect profit margins, some may look to review the cost of their insurance premiums. But could getting by without certain insurance policies help you make it through the downturn? Or would it leave you dangerously exposed?

To answer this, you need a keen awareness of the risks your business could face and how to safeguard your personal wealth. You also need to understand how business insurance policies work.

What is business insurance, and do I need it?

There are five key types of business insurance designed to offer protection if you or a key member of staff die or become incapacitated:

• shareholder protection – which ensures shareholders keep control of the company if one of them dies
• loan protection – which helps meet financial commitments if you become critically ill or die
• key person cover – which protects the impact on profits if an integral person becomes ill or dies
• relevant life insurance – a tax-efficient form of life insurance taken out by the company, which pays a sum to the employee’s family if they die
• group schemes – including group income protection, critical illness or private medical insurance to support employees’ financial wellbeing

Generally, these policies are different from some policies you use in your personal life such as house and car insurance. The latter can be switched regularly to reduce premiums. But business protection plans tend to be longer term, with fewer price swings, so it’s probably not worth comparing prices regularly with a view to switching.

Alex Cleanthi, Joint Head of Protection at St. James's Place, says: “As you get older, premiums for policies that pay out on death or incapacitation go up as the chance of being ill increases. You won’t be able to replace a like-for-like policy for less.

“You might be able to review the advice you were given on protection to see if the policies are still appropriate or needed. But providing your initial advice was good, it’s unlikely you will want to cancel those policies as they protect against important risks in your business. The chances are you’re actually underinsured.”

For example, 59% of businesses would cease trading within 12 months if they lost a key person, according to a Legal & General report.1 Yet many companies don’t have key person protection. For newer businesses, 33% would cease trading immediately if they lost a key person.

The research also shows that 75% of businesses have some form of debt, yet many don’t have business loan protection. And almost two-thirds (64%) haven’t heard of a relevant life plan, despite it being an important and tax-efficient employee benefit.

The dangers of cancelling insurance

“It’s natural to review all costs if an economic downturn threatens your margins,” says Alex. “But when you review your insurance, you need to think about why you decided to take it out in the first place, which is to remove important risks that you don’t want to take on.

“A good financial planner wouldn’t advise you to take out any insurance simply as a ‘nice to have’ – it’s there for a reason. So providing you were well advised, it’s counter-productive to cut costs on insurance.”

Alex also warns that if you cancel a policy thinking you’ll repurchase it later, it could be more expensive when you come to do so. And if you suffer any medical issues in between, you may be unable to take it out.

How we can help

If you’re concerned about your insurance policies, we can help you review them and make sure you still have the appropriate cover.

Not many advisers are business protection specialists, which is why companies often end up with the wrong types of insurance – such as a relevant life policy when shareholder protection would have been more appropriate to cover the risk in the business. This is why some insurance companies report relatively high lapse rates, even with clients who have spoken to a financial planner.

Our lapse rates are extremely low because we have specialist business protection advisers who ensure your policies are exactly right for you and set up correctly from the start.

Which cover you need is often a complex decision as it depends on a wide range of factors surrounding the risk in your business, your personal circumstances and risk tolerance. It will be different for each SME owner and each company, and specialist advice is essential.

Will Burns | Financial Planner - [email protected] or 07508 493 410

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1Business Protection: State of the Nation’s SMEs Report 2021, Legal & General, December 2021 (Based on a survey sample size of more than 500 small businesses)

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