A business's failure to look ahead could prove fatal

The past few years has seen the Financial Conduct Authority (FCA) increasingly focus on advisers’ processes when it comes to dealing with clients. The new consumer duty rules, which come into full force from 31 July, are the representations of the FCA’s efforts to ensure that clients receive good advice and advisers deliver good outcomes.

Commenting on the new duty of care, Robert Betts, the Market Development Manager at Legal & General, said, “The new overarching consumer duty guidance is focused on three simple key areas – acting in good faith towards your clients, helping clients avoid foreseeable financial harm and helping clients achieve their financial goals.”

Although the new consumer duty rules are primarily aimed at retail consumers, it does mean that your broker should now be more focussed than ever on spotting areas of financial risk while they also help you to gain easier access to specialist advice.

Zanele Sibanda, Head of Internal Markets at Towergate Health & Protection, said, “This is a positive step forward and, although aimed at retail customers, we equally care about what happens to our business customers. The new rules will result in all business clients being given the opportunity to speak to the right adviser about their business continuity plans and to consider how their businesses would deal with the financial shock of losing key people unexpectedly.”

Business owners have good intentions. They're just busy

Starting a business sets you on a certain trajectory:

• Entrepreneurs use their passion, skill and expertise to make their business successful, perhaps in hopes that it will provide for them and their family after they retire
• Along the way their business (if successful) will grow and they will often naturally acquire the services and skills of additional business partners and employees, becoming reliant and dependent upon them to deliver the business’s continued success and growth
• Rarely do people have time to stop and take stock of what would happen to their business if a key person died or became too sick to work.

You may not have asked important questions like:

• How would my business survive if I lost a key person whose skills or client relations my business’s success depends upon?
• How could I afford to pay the bills or maintain my lifestyle if business revenue plummeted suddenly due to the loss of a key person?
• Have personal guarantees for loans taken out during the pandemic been put in place?
• The pandemic has resulted in three-quarters of businesses having done some form of corporate borrowing. How was it secured?
• What happens if the person responsible for the debt dies?

Often, when business owners think of a business risk, they think of things like IT security breaches, liability risks or fire, flood, and theft.[1] You might not think about the impact of losing the skills or profits delivered by key people and the financial ramifications; 94% of SMEs have at least one key person whose loss would cause a big financial problem for the business, yet it’s estimated that less than one in five businesses have any form of cover for their business debts.

Life insurance: Most of the time, it's not about death

When you think about life insurance, do you think about death? Most people probably do. The reality, however, is that although some policyholders do die early, you are far likelier to survive and live with the effects of a critical illness, like cancer, heart attack or stroke, or be unable to work for a long period of time. All of these have financial consequences for both your business and your family.

For women, for example, cancer is the most claimed for condition within both life insurance and critical illness cover.

Plus, did you know that the average age of a business owner is about 40 years old, while the average age of a claimant for a critical illness like cancer or stroke is around 48 years-old?[2] When it comes to long-term sickness, the average age for an income protection claim drops to just 39 years-old.

It’s clear, then, that business owners cannot afford to wait until such a problem has arisen. But these events don’t have to deal unrecoverable blows. If you, a key person or an employee gets seriously ill, insurance means that you can speedily provide valuable and much needed cash injections so that unwell employees can focus on getting better, and the business can hire new talent or repay business debts, and not have to worry about plummeting profits.

[1] Legal & General State of the Nation’s SME

[2] Legal & General