Nathaniel Lee – Managing Director, Business Protected & IPTF Ambassador.
Market Overview: The Growing Demand for Income Protection in the UK
It’s been widely reported that the industry has seen significant growth in income protection (IP) sales over the last few years as advisers and clients alike see the value these policies can offer. It is often said over the years that income protection is the most undersold protection policy, with sales lagging behind life assurance and critical illness cover historically, probably due to its more complex nature, so it is great to see its growth.
Having said that, I would argue that business protection is really the most undersold group of protection policies in the market. Sales in this area will naturally be lower given that there are fewer small to medium sized enterprises (SMEs) than there are individuals, however, there is still a significant number. Around 5.6m at the start of 2023 according to GOV.UK estimates. One source confirms that these businesses employ about16.6m employees which is 60% of the employees in the private sector.
Business protection and specifically its various options for Income Protection can be incredibly powerful safety nets for business clients who range in size from single individuals to large corporates.
Product Framework: Understanding the Key Types of Income Protection
Before diving into how these products fit specific customer segments, I want to give an overview of the three frameworks of business income protection that are available in the market. These include: EIP – Executive IP, KP IP – Key Person Income Protection and GIP – Group Income Protection. Let me explore these one by one.
Executive Income Protection (EIP)
Think of Executive Income Protection as an individual version of Group Income Protection (GIP) akin to how Relevant Life Plans can be thought of as individual versions of Death in Service schemes. Predominantly designed for business owners and senior members of staff, EIP provides a sick pay arrangement for businesses for their key members of staff beyond the period they could comfortably cover sick pay from profit. This is incredibly important as it allows SMEs to provide for staff members who are not only important to the businesses growth and stability but who have often been with the business for years. Providing EIP to the right people is a valuable employee benefit which can not only provide financial support but also buy good will.
Covering up to 80% of the employee’s salary, dividends and other regular income as well as employers National Insurance Contributions and employers pension contributions, it can be a fantastic solution especially when considering that it is often an allowable expense for running a business.
It is owned, paid for and proceeds received by the business. Following receipt of the monthly income benefit, deductions are made for NIC, income tax and pension contributions so the individuals pension pots continue to grow in their absence from work and the net figure is paid to the individual.
Executive Income Protection pairs with Key Person cover very well as the former provides the individual with a financial safety net and the latter provides the business with one.
Currently there are only two providers of EIP – LV= and Legal and General. You can visit their websites to understand more details.
Key Person Income Protection (KP IP)
Whilst Key Person Income Protection is probably the least sold IP product in the market, the individuals it is designed to protect are often the same as for EIP – business owners and key senior individuals.
However, it’s objective is to protect the business from the financial implications of an individual’s absence, not to provide the individual themselves with remuneration. The ‘key’ person could be anyone from the founder of the business to a top salesperson or technical expert who is essential to operational success. KP IP ensures that the business has the financial resources to weather the absence of this individual, which can help cover temporary replacement costs or offset the loss of revenue while the key person recovers. If can also be used to maintain debt repayments whilst they are absent. This type of protection is vital for companies that depend heavily on specific individuals for their success.
Covering a percentage of share of gross profit or a percentage of their income to aid recruitment, this form of income protection is only available on a short-term basis given that it is unlikely to be required for more than a few years. By then, the expectation is that the business will have recruited a replacement and should therefore become stable.
Group Income Protection (GIP)
Group Income Protection is typically used by businesses to provide cover for some or all of their employees as a group. Unlike individual income protection policies, which cover one person at a time, GIP offers broad coverage to a group of 2-3 employees or more. Less common than Private Medical Insurance and Death in Service, it is still an excellent employee benefit option for SMEs providing both short- and long-term income replacement solutions for employees who are unable to work because of physical or mental health reasons.
GIP is often considered for established companies with ten or more staff. It is much less common for smaller businesses as EIP is available. However, where there is significant business growth predicted, a GIP policy can be the best option as the company expands.
One major advantage of GIP over EIP is the Free Cover Limit or Automatic Acceptance Limit which increases proportionately with the number of lives covered. Under this limit, the individuals will not be required to answer in depth medical questions as they would on an individual plan.
Like EIP there is the option to cover NICs and pension contributions.
Customer segments & Tailoring recommendations
It is important to have a sound understanding of the options available in the market to ensure that each customer segment is catered for in the most appropriate way. It is important not only to understand the client’s current situation but also their plans as this may impact the recommendation.
There are four identifiable Customer Segments. These are Sole Trader, Solopreneur, Stable SME and Growing SME. Let’s look these in a little more detail.
Sole Trader – Upfront Financial Underwriting
Whilst we haven’t touched on Sole Traders so far, predominantly as none of the options discussed above are appropriate, it is important to consider their needs, especially given many of these individuals may consider a limited company structure in the future if they expand.
Another reason it is important to consider them as a distinct customer segment, is that they don’t have a sick pay arrangement provided by their employer. The recent Reaching Resiliency report by LV= identified some key valid facts:
· Only 1 in 7 self-employed individuals had income protection.
· 20% would have to work through sickness or injury.
· Savings was reported as the top source of income if they were unable to work but 1-in-4 had less than £1,000 saved.
· 29% reported being unable to last even a month without additional income.
Given that most providers financially underwrite at claim, one of the most important considerations is a financial guarantee or up front financial underwriting to ensure that should a sole-trader’s income fluctuate, they have a pre-agreed guaranteed amount underwritten.
Solopreneur – EIP or Upfront Financial Underwriting
Like Sole Traders, one-person limited companies often require the financial safety net that income protection provides. Often, they will benefit from full financial underwriting and a guaranteed benefit level from outset to avoid a reduction in benefit if claims are made following a downturn in their business’s financial performance.
However, another consideration is if they should apply for cover through their limited company. Their accountant would need to make a judgement on if this would qualify as an allowable expense. Given that they are the only one in their business, the fact it can cover employers NICs and pension contributions should be considered. Providing for long term financial security beyond the term of the plan, i.e. into retirement, can be hugely attractive.
Whilst it is not currently possible to have both, financial guarantee and a tax-deductible product it is a useful conversation to have with a client so they can choose the best form of cover that aligns with their priorities.
Stable SME – EIP for Leadership Teams
For stable SMEs, the priority is typically the leadership team, as these are the individuals who drive the direction of the business and whose absence would be most impactful. Executive Income Protection (EIP) policies are ideal for this segment, as they provide tailored coverage for key staff. A stable SME can ensure that its leadership team is financially protected, and the company can relieve the burden of continuing to pay the absent individual whilst they are not working.
This is the segment that EIP is most appropriate for and can be paired with Key Person protection, be it KP IP, Life or CIC, to protect the business financially during a time of severe disruption.
A GIP product will likely be appropriate for SMEs at the larger end of the spectrum if employee benefits are of interest.
Growing SME – EIP for Leadership Teams and/or GIP for Staff
As businesses scale, they often hire more employees and expand their leadership teams. For growing SMEs, it’s essential to consider both EIP for key personnel and GIP for broader employee coverage. GIP becomes especially relevant as the business grows, helping to protect the income of staff members and maintain employee morale and productivity in the event of illness or injury. A balanced approach to EIP and GIP ensures that the company’s leadership remains secure while also safeguarding the workforce.
In some instances, the requirement for EIP will not be present as the senior team will be covered under this plan. However, it could be that the GIP scheme only covers a percentage of basic salary and no dividends. Where the senior leadership own the business and take most of their income in dividends, separate EIP schemes may be more appropriate.
How to Approach the Conversation: Engaging Business Owners and Decision-Makers
We’ve looked at different product frameworks and customer segments, but how do you approach the conversation?
When discussing business income protection with clients, it’s important to take a consultative approach. The conversation should begin with fully understanding the client’s specific needs and their challenges, followed by a thorough assessment of their key employees and leadership team. Focusing the discussion on the company’s structure and size will help highlight the most appropriate products.
Three very basic initial questions that can lead to productive conversations with clients include:
- What would happen to your business if one of your key employees couldn’t work due to illness or injury?
- Are you currently providing any income protection for your staff?
- What is your sick pay policy and for those that mean the most to the business, would you continue to pay them beyond this point?
By framing the conversation around these pain points, you can help the business owner see the value of income protection. Essentially, being comfortable handling any client objections is crucial.
Lead Generation: Building a Strong Network for Business Income Protection
Generating leads for business protection requires a strategy that focuses on building relationships and leveraging professional networks as well as utilising online marketing strategies. Business owners often don’t think about business protection until an event occurs, so proactive outreach is key.
It is important to have as many referral sources as possible, such as:
1. Professional introducers – accountants, solicitors, brokers and others in professional services.
2. Networking – this area of advice is one that hinges on good quality face to face relationships. Building these through networking can be incredibly valuable.
3. Online marketing – SEO, PPC, social medical etc. are all valuable ways of getting in front of the target market en masse.
Conclusion
Understanding the proposition options available and being clear which clients they are suitable for is crucial to offering holistic advice for your business clients in a compliant way and under Consumer Duty rules.
For those who want to offer this advice themselves I would strongly encourage you to reach out to your provider BDMs, watch webinars and upskill yourself. I have noted some articles, webinars and clips below which you may find useful.
For those that can see its importance but who either do not wish to advise in this area or who are not allowed to under their permissions or Network, then having a referral partnership with a specialist brokerage such as my own business – Business Protected can earn you income via a referral partnership.
Useful Education links and articles:
IPAW 2024
Monday – how to get clients – “The case for income protection – mindset matters” – Income Protection Action Week 2024 – YouTube
Tuesday – preparing for a successful client meeting – “How to sell less income protection – Common mistakes and how to avoid them” – IPAW 2024
Wednesday – objection handling – “How to grow your business – Knowing your clients” Income Protection ACTION Week 2024
Thursday – tools and underwriting – – “The business of protection – Preparing advisers to excel” – Income Protection ACTION Week 2024
Friday – regular reviews & value-added benefits & advice for brokers – “Delivering value – The full package” – IPAW 2024
Industry Comment
There’s a real opportunity for advisers to bridge the gap for clients. They play a crucial role in selling business protection to SMEs by leveraging existing client relationships and identifying potential leads.
It’s rightly become essential for advisers to consider a client’s entire financial picture, ensuring the good customer outcomes and the avoidance of foreseeable harm. While this may have been standard practice for some, others may not have had the resources to cover such a range of factors in each client’s financial life.
Any business, regardless of size, could face an unexpected loss of an owner or key employee at any time. Simple planning with clients can reduce their risk and really demonstrate the value of advice. Whether that client is in a partnership, a member of a limited liability partnership (LLP), a sole trader or a Ltd company Shareholding director.
The complexity of business income protection presents an advising opportunity. It involves breaking down barriers for clients who might not proactively choose suitable cover. Providers also need to offer robust support, training, and development that goes beyond product-focused support. This ensures advisers have the tools they need to achieve good customer outcomes and capitalise on market opportunities to grow their business.
Julie Godley – Director, Intermediary (L&G Retail)
“As made clear in this informative article, Executive Income Protection enables businesses to provide their employees with meaningful sick pay arrangements in an efficient and sustainable manner that benefits business and staff alike. Since launching our Executive Income Protection product in 2021 we have seen demand for both employer sponsored personal protection and pure business protection products grow significantly. Many advisers will have existing clients who are business owners who would undoubtedly welcome a conversation about the ways in which they protect their businesses and employees from the financial difficulties that can follow unexpected misfortune. Thanks to Nathaniel for so clearly highlighting this important topic and the ways in which we can support advisers and clients.”
Mike Farrell – Protection Sales & Marketing Director LV=
