The protection gaps sitting in your files

The gap nobody owns

Protection is the least interesting subject in financial planning and the one that does the most damage when it is missing. It is also the gap most often visible from the accounts rather than from anything the client says, because what shows up is borrowing, dependence and structure rather than a stated worry.

Owner-managed businesses are particularly exposed. The company depends on one or two people, the borrowing is usually personally guaranteed, and the shareholders often have no agreement about what happens if one of them dies.

The four kinds, in plain terms

• Key person cover. The company insures itself against losing the person it depends on. It pays the company, not the family, and is meant to keep the business trading long enough to recover or be sold.
• Relevant life cover. Life cover for an individual director or employee, paid for by the company. Usually allowable as a business expense, and not normally treated as a benefit in kind.
• Shareholder protection. Cover paired with a cross-option agreement so the surviving shareholders can buy the deceased shareholder’s shares, and the family gets cash rather than a stake in a company they cannot run or sell.
• Personal protection. Life cover, critical illness cover and income protection for the individual and their family, held personally rather than through the company.

What in the file says it is missing

• A charge registered at Companies House against the company, particularly in the last two years. New lending at any size is usually personally guaranteed.
• A directors’ loan account in credit that the family would be relying on.
• Two or more shareholders and no shareholders’ agreement you have ever seen.
• A company whose turnover clearly rests on one fee earner or one relationship.
• No premiums anywhere in the profit and loss account, which is the plainest signal of all.

The last one is worth a specific look. If a company with borrowing, employees and dependants has no insurance cost in the accounts at all, nothing has been arranged rather than something having been arranged badly.

The shareholder problem, specifically

Two or three shareholders with no cross-option agreement is one of the most common and most serious gaps in an owner-managed client book, and it is almost always visible to the accountant and nobody else.

Without an agreement and the cover to fund it, the death of one shareholder leaves their family holding shares in a private company they cannot run, cannot sell and cannot value, while the survivors run a business with a passenger they did not choose. Every outcome from that point is worse than the one that five minutes of planning would have produced.

• Ask whether there is a shareholders’ agreement, and whether anybody has read it since it was drafted.
• Ask what the surviving shareholders would use to buy the shares if they had to.
• Ask whether the family would want the shares or the money.

Those are factual questions about arrangements, not advice, and the answers are usually enough to make the case on their own.

What it typically costs

Accountants often assume protection is expensive because the sums assured are large. For a healthy person in their forties or fifties it is usually the cheapest thing in a financial plan relative to what it does, and it is frequently cheaper arranged through the company than personally.

Costs depend on age, health, smoker status, the amount and the term, so no figure can be given in the abstract. What you can say without straying is that the client is very likely to be surprised in the right direction, and that finding out costs nothing.

The structural point matters more than the price. Relevant life cover paid for by the company is normally a deductible business expense and not normally a benefit in kind, which makes the same cover materially cheaper than the equivalent personal policy for an owner-director paying themselves through salary and dividends.

What you can say

You are describing an exposure you can see in the numbers, not recommending a policy.

Wording you can use“I noticed the new facility went on the register last year. Facilities that size are almost always personally guaranteed, and in my experience the guarantee itself is rarely insured. Would it be worth half an hour with somebody who can look at what happens to that guarantee, and to the family, if something happened to you?”

What you must not do is indicate the type of cover, the amount, or whether a particular arrangement would be suitable. That is the adviser’s work and it is regulated.

The order to raise things in

When several gaps are visible at once, the order that works is exposure first and product never. Start with what the client would lose, not with what could be arranged.

• The personal guarantee, because it is specific, recent and documented.
• The dependence of the company on one person, because the client already knows it is true.
• The shareholding, because the consequence is easy to picture.
• Personal and family cover last, because it is the part clients assume is already dealt with and often is not.

Why it is worth your time

Protection is cheap relative to what it covers, it is usually structurable through the company, and it is largely untouched across most owner-managed client books. It is also the conversation clients thank their accountant for years later, because the alternative outcome is the one nobody plans for.