The trouble is, self-insuring means the money comes out of the firm’s bottom line – and can that cash flow always keep flowing? What happens when that money for ‘self insuring’ runs out?
Richard Kateley, head of intermediary development for Legal & General, spells it out: "For smaller businesses, the death of an owner or director can have a significant impact on the future of that firm.
"Whether it is the potential loss of revenue, or the cost of finding a replacement, the loss of a key employee for a small-to-medium-sized enterprise can be a potentially disastrous situation, that could end in the business having to cease operations."
Although the risk of closure might be less in a larger firm, say one with more than 250 employees, there is still a potentially large effect that the death or critical illness of a senior employee can have on the firm.
Mr Kateley adds: "After all, that employee might have owned important business relationships that could be at threat if the person dies or is diagnosed with a critical illness."
For Tom Conner, director of insurance at Drewberry, the contribution of the key employees to a business should not be underestimated by clients.
He opines: "The loss of that person's ambition, talents, vision and drive could have a devastating financial impact on a company."
As Emma Thomson, life office relationship manager for Lifesearch, comments: “It’s about the survival of a business. If you are an acorn (one to two years old), a sapling (two to 10 years) or a mighty oak (more than 10 years), it all still matters.
“Financial protection should always be considered as essential because you are protecting the people that create the business, and in turn the profit and the succession.”
Influencing factors
Factors that might lead owners to consider business protection:
There are many different risks facing businesses: the death or illness of an owner, the loss of the main profit-earner; liabilities; talent management and retention.
- Owners and partners: "If a partner or shareholder dies or is diagnosed with a critical illness," says Mr Timpson, "the surviving owners could lose control of the business." This could affect control, direction, the future strategy, investment, and the ongoing success of the business.
- Profit: If a business loses a key person who influences revenue, such as a head of marketing or head of sales, then the firm may require a cash injection to replace lost profits and meet additional costs, such as recruiting a replacement.
- Liabilities: Many companies know the value of keeping cash in the bank to cover any potential liabilities, but these are usually the things that have been planned for, such as new equipment or a new role or a looming tax bill. But what happens if the key person who brings in the revenue suddenly dies or is taken severely ill with a critical condition, and the company is still carrying loans or other debt? That cash buffer soon gets eaten away and then investors and creditors can call in the debts. One only has to see programmes such as 'Can't Pay? We'll Take it Away' to know how easy it is for small companies to slip into debt.
- People: Talent management is a crucial issue - not just in terms of hiring the right candidate but also in retaining and motivating them. Research carried out by Scottish Widows over the past 18 months into employer benefits has revealed that, where employers provide additional benefits in the workplace, people are more likely to be attracted to and remain with that employer.
Mr Timpson adds: "Should the business want to be a more attractive place to work, relevant life cover is a tax-efficient insurance policy, allowing businesses to offer a death-in-service benefit to its employees (including salaried directors).
"It is set up by the company and pays out a tax-free lump sum on the death or diagnosis of a terminal illness, of the person insured."
There are other potential threats: shareholders in a privately owned company (regardless of the size of the company) may have to use their own personal wealth to buy shares if an owner dies, or risk those shares being tied up in probate.
