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Why Business Protection is essential for sole traders

19 December 2015 | LV= Article


‘If I die the business dies’

Sole traders are a vital part of the economy, with 3.3 million operating in the UK. Put into context, there are more sole traders compared to partnerships, limited liability partnerships and limited companies combined - presenting advisers with a big business opportunity.

One in seven of the workforce is self-employed, and the number of people working for themselves has increased by 30% since 2000. But how can advisers successfully pitch Business Protection to the solo entrepreneur? Especially when so many sole traders (wrongly) assume, ‘if I die, the business dies with me’.


Why sole traders need a succession plan

When a sole trader dies a number of financial and contractual obligations still need to be fulfilled – regardless of whether the business carries on trading or is wound down. Without succession planning, these will usually fall to a spouse or the next-of-kin, and can include:

  1. Finance – outstanding overdrafts and finance will need to be transferred (or paid off) and the new owner will be expected to brief investors on the ability to meet existing commitments.
  2. Clients – ongoing contracts will need to be assessed; the family or estate may need to recruit a sub-contractor to fulfil existing commitments, or employ additional staff. Alternatively, penalties could be imposed for the non-delivery of goods or services.
  3. Leased premises – the landlord will need to be informed of the sole trader’s death and a new lease may be required. If the business is wound down, significant penalties might need to be paid if the premises are no longer needed.
  4. Employees – 13% of sole traders employ staff using the PAYE system. Even though the name of the business may have changed, Transfer of Undertakings (Protection of Employment or TUPE) regulations mean employees still have a right to continued employment. If the new owner intends to cease trading then staff will be entitled to redundancy pay. Any outstanding litigation and tribunal claims will continue, so the estate or family will be expected to deal with these as well.
  5. Health and safety – whoever takes over responsibility for the business will be held accountable for all health and safety matters? They will need to make sure all regulations are being met, are risk assessed and properly documented. This may need to be outsourced.
  6. Insurance – any insurance policies will need to be transferred into the name of the new owner and might require specialist advice.
  7. Updating the trading name – all relevant paper work (invoices, letterheads etc.) need updated e.g. Steve Jones t/a Jones Construction will now trade as Jane Jones t/a Jones Construction.

Key Person cover (written in trust, on the life of the sole trader) can provide the deceased’s family with the money needed to meet these obligations. However, many sole traders have given little or no thought about their responsibilities if they die - let alone their family’s legal commitments, even though the costs to meet these can be high.


Buying the family time

A lump sum payment will help ease much of the pressure felt by the family, who will already be dealing with the devastating loss of a loved one. They can use the money to decide what to do with the business - a specialist can be recruited who is able to make sensible decisions regarding its future. If the family chooses to wind down the trading activities, the money paid from Key Person cover will ensure any employees are appropriately compensated, outstanding debts are cleared and all other commitments are dealt with. If the family decide to continue trading, they will be able to cover existing obligations and ensure running costs are met during the recovery period.

These ongoing business liabilities should give sole traders a big wake-up call. And advisers should be ready to recommend Key Person cover that includes the appropriate features for sole traders:

  1. Advisers will want to make sure that the guaranteed insurability options can be exercised by sole traders, and if possible, include the option to increase cover based on a rise in net taxable earnings.
  2. If recommending life insurance and critical illness cover and the sole trader has a young family, it’s worth checking children’s cover is included (as some Business Protection policies exclude it). During a period of intense family stress and worry, having the funds available to support the sole trader so they can spend more time at home could be immeasurably valuable. Likewise, if the sole trader has key employees who have children.
  3. Some Business Protection policies now include a number of value-added benefits, including free access to services such as legal helplines, HR support, funding guidance and regulatory advice. These resources can be invaluable to sole traders (and their loved ones during a claim), who would have to pay for comparable services separately. Research by LV= reveals 38% of businesses who have access to equivalent services have used them, and 68% of all business that have them rate the support as invaluable.

Sole traders now make up such a significant part of UK business – so having products and advice standards specifically catered for them should be an important consideration for both advisers and providers.


You can find out more about LV= Business Protection (including Key Person cover for sole traders) at LV.com/businessprotection

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