Research by insurers Legal & General has revealed that many SMEs are not adequately protected against debt liability or the death of a key employee.

A ‘Serious Protection Gap’Legal and General Report

The findings were published in Legal & General’s latest bi-annual business protection report, ‘State of the Nation’s SMEs’. The company said the survey ‘throws into light the serious protection gap facing some UK businesses and the subsequent need for expert financial advice.’

The report found that many business owners had given little thought to the fate of their businesses or finances if they became critically ill or died, and had not put protective measures in place.

  • More than half (53%) of UK small and medium-sized enterprises (SMEs) said they would close within a year if a key employee died or became critically ill.
  • 51% of UK business owners have not included instructions about company shares in a will.
  • Only 41% of business owners have life cover in place.

‘We can see from the research sample, 92% of SMEs have three owners or less.’ Said the report. ‘This could perhaps indicate that their businesses would be most affected in the event of a death or critical illness of a key person and so key person cover could be an essential product for smaller businesses.’

Richard Kateley, head of intermediary development at Legal & General, said: “Many businesses insure what they can see and feel, such as their contents, property or vehicles, but many forget about a business’s most important asset – its people.

“For over half of the SMEs we surveyed to believe they would last less than a year should a key employee die or require a long absence due to a critical illness is worrying in itself; the fact that it is a risk that they have not considered or realised before is an even bigger worry.

“It is vital that businesses consider protecting their future against such an eventuality.”

Debt Protection

The report also showed that many SMEs were not protecting themselves against the risk of business debt. 65% of the companies surveyed had some form of business debt – a percentage that has doubled since 2013, when only 32% said they had business debt. Yet 75% said they did not see the need for business loan protection or hadn’t considered it.

Richard Kateley said Legal & General have become market experts in business protection and the corresponding lack of awareness among SMEs of the risks they face,

“Our aim is to drive the right conversations to help business owners on business risk,” he said in his introduction to the report. “Many owners are focused on the day-to day pressures of running their business and its profitability. However, a high number lack vital cover for unforeseen events or possibly are unaware of the risks that they may be facing.

With the right knowledge, businesses are better placed to make the right decisions in protecting themselves. This begins with adviser/client conversations and properly evaluating the risks a business faces.”

Some 53 per cent said they would close after a critical event such as an employee’s death – an increase of 13 per cent on 2015, according to Legal & General’s state of the nation’s SMEs report, which surveyed more than 800 small businesses.

New companies (67 per cent) and sole traders (73 per cent) were the most likely to say they would not last beyond a year in the event of a death or other critical event.

Yet despite a widespread awareness of the risks, around a third (32 per cent) of SMEs said they had not even considered key person insurance, while another third (31 per cent) said they had not got round to looking into it.

A further 28 per cent said they thought cost would be an issue in taking out a key person policy.

It is vital that businesses consider protecting their future against such an eventuality and advisers can play a vital role in this.

Roy McLoughlin, associate director at London-based Cavendish Ware Wealth Management and Financial Planning, said: “Every time I read something like this it shows me that there is an education piece that needs to be performed by advisers to show how liable these companies are to deaths and critical illness.

“It goes hand in hand with the issue of succession planning – if a person dies, what happens to their shares?

“Everyone forgets that the UK is dominated by small companies, not large ones, and they often get forgotten as business prospects, even though they make the most loyal clients and give referrals.”