1 BUSINESS PROTECTION RESEARCH.This is not a consumer advertisement. It is intended for professional use only and should not be relied upon by private individuals or any other persons.

2 LEARNING OBJECTIVES. 1 To quantify the business protection opportunity for advisers and how they can best develop this market by exploring the demographics of UK businesses and how business protection fits into their context. 2 Understand business owners’ attitude to risk within the context of business protection and the risk areas that business protection products protect. 3 Understand the UK corporate debt landscape, the need for key person cover, share protection and business owners attitudes towards it. Over the past six years we have conducted three waves of research into business protection to gain insight into the market and the risk businesses face. We’ve found that year on year there is clearly a lack of awareness of business protection, among business clients showing that businesses have not evaluated the potential risks. To be honest I do not thing that this lack of awareness is limited to clients as many accounts have limited knowledge and few advisers operate in this market so I guess it is no surprise that the SMEs themselves have not considered the risks and asked themselves - What would happen to a business if the owner suddenly died? A key employee was unable to work? Could either of these put terminal pressures on the businesses bottom line? With the right knowledge, businesses are better placed to make the right decisions in protecting themselves against certain unexpected events. This begins with adviser/client conversations and properly evaluating the risks a business faces. It’s all about helping to Get Business Assured. Within our research we asked over 800 business owners some very leading questions which I hope will help you start these conversations with your business clients.

3 STATE OF THE NATION’S SME’S REPORT.Over the past six years we have conducted three waves of research into business protection to gain insight into the market and the risk businesses face. We’ve found that year on year there is clearly a lack of awareness of business protection, among business clients showing that businesses have not evaluated the potential risks. To be honest I do not thing that this lack of awareness is limited to clients as many accounts have limited knowledge and few advisers operate in this market so I guess it is no surprise that the SMEs themselves have not considered the risks and asked themselves - What would happen to a business if the owner suddenly died? A key employee was unable to work? Could either of these put terminal pressures on the businesses bottom line? With the right knowledge, businesses are better placed to make the right decisions in protecting themselves against certain unexpected events. This begins with adviser/client conversations and properly evaluating the risks a business faces. It’s all about helping to Get Business Assured. Within our research we asked over 800 business owners some very leading questions which I hope will help you start these conversations with your business clients.

4 WHO DID WE SPEAK TO? We spoke to a range of businesses in the UK – from limited companies and sole traders to partnerships and limited liability partnerships. The businesses we spoke to also varied in stages of their development. So before we delve into the research lets look at the demographics of who we spoke to. We set a cap of 25% on sole trades as we did not want this to squew the figures and we tried to get a good spread of businesses from new to mature. One point that many people find surprising is that actual make up of the SME market in the UK. We have circa 4.9 million private sector business in the UK and they employ 81.6% of the UK workforce. 98.2% have less than 10 employees and these are the businesses that you should be targeting as these firms do not have the depth in human capital. 28% ltd million 9.3% partners k 62.7% sole - 3million 99% of the estimated 5.4 m businesses in the UK are SMEs Circa 95% have fewer than 10 employees SMEs employ 24.3m (81.6% of the UK workforce) Source: Legal & General State of the nation’s SME report, March 2015

5 79% Have 3 owners or less. WHO DID WE SPEAK TO?79% of all SMEs have 3 or less owners so when you are going to meet these firms you are not sitting around a board table with 20 people it is much more likely that it will be 1 or 2 decision makers. This is a real growing sector of the UK economy • In 2014 the UK hit a business start up record figures released in November 2014, recorded close to 500,000 new businesses. This was a full month earlier than the same count was reached in The final estimate for 2014 was close to 550,000 – a new record.** • 18% of all UK SMEs are female-led These contributed around £50bn to the UK economy between 2006 and 2010 (equivalent to 12% of UK output generated by SMEs)* And then we have the average age being 48 why is this important well it is a dangerous demographic (click) Source: Legal & General State of the nation’s SME report, March 2015

6 A VULNERABLE DEMOGRAPHIC.Critical Illness Claims Life Cover Claims Average ages 48 49 42 In 2013 we paid 2,504 critical illness claims and the average claimant age was 47 for life assurance it was 61yrs. 72.6% of our CIC claimants were aged between 41 and 60. Premiums are higher for these age ranges because the risk is higher and one reason why we see less CIC sales for business cover but these are the very people that need the cover. When you sit down with a business owner use mortality tables to remind them of the likelihood of suffering a critical illness, either speak to your contact at any provider for detailed information or just Google ‘odds of suffering a critical illness’. Get your clients to have a play around with one of the online calculators that predict chances of serious illnesses based on lifestyle factors, these things can help clients understand the need for appropriate protection. Source: Legal & General Claims in 2013

7 PERSONAL INSURANCE. Those with Pet insuranceWe wanted to understand what business owners views were of protection so we asked what personal protection they had. So this is just their own protection. 40% had life cover, a point to consider here is could they benefit from changing this to a Relevant life plan? More on that later Overall there is awareness of the benefit of protection from a personal perspective – but what about from a business one do they even know it exists? I always find it interesting when you look deeper into people who have pet insurance and here are some of the interest points we found in this research. For me the one that stands out is that 60% of people who had insured Fido had not taken out Key Person protection, if they understand the benefits of key Pet Insurance surely they will grasp the need for Key Person protection!! So why don’t business owners take out insurance (Click) Those with Pet insurance 47% of those with borrowing have NO protection 49% with 2 or more business owners have NO share protection 60% have NO key person protection Source: Legal & General State of the nation’s SME report, March 2015

8 All employers staging now include all micro SMEs.AUTO ENROLMENT FACTS. Over 1 million small and micro employers with regulatory duty to stage over next 3 years. All employers staging now include all micro SMEs. STAGING PROFILE SCHEME SIZE 2015 2016 2017 2018 TOTAL Medium (10 to 50 staff) 46,300 76,800 66,100 8,700 197,000 Micro & Small (0 to 10 staff) 435,200 594,900 78,300 1,108,400 512,000 661,000 87,000 1,306,300

9 AN OPPORTUNITY?

10 The business underpins everything Is it’s future protected?BUSINESS PROTECTION. Employees Sales Customers Costs Market Suppliers Debtors Creditors Profits Bank Owners Overheads Competitors For me the great thing when we talk about protecting businesses is that we are not just protecting the life assured and their family like with our domestic protection but we are also protecting staff, investors, customers, suppliers and anyone else who has a financial stake in the business. Business owners quite often feel that they have a parental care responsibility for their staff and by protecting their business they are also protecting their staff, their mortgages and families. The fundamentals Business protection are no different to domestic protection and business owners are no different than your domestic clients– they simply have different needs and objectives. But at the end of the day with domestic protection we are trying to protect their debts and income so they can keep ownership of their homes, pay their bills and keep their lifestyle. With business protection we are trying to protect their debts, cash flow and ownership of the business so that they can keep trading and supporting their staff and customers The business underpins everything Is it’s future protected? Source: Legal & General State of the nation’s SME report, March 2015

11 BUSINESS PROTECTION. Will the business survive? Workloads Key peopleLoans Sales Employees livelihoods Debtors Creditors Profits Bank Owners Director Loan Accounts Their families One of the simplest questions we can ask a business owner is ‘how long will your business survive without you? without your best salesman?, without your production manager?’. Before you ask these questions most people will have given it any consideration. Very much like domestic insurance, death or serious illness and its implications are not a common topic of conversation around the board table. But it should be, along with what will happen if the office burns down or the computer system was to crash as you say it should form part of any businesses disaster recovery plan. Let’s face it a computer or a building can be replaced or rebuilt the same is not always the case if a key person or business owner dies. When you consider that for the minimal cost of some professional advice and some protection all this can be avoided. The business underpins everything Key Person Protection Shareholder / Partnership Protection Loan Protection Source: Legal & General State of the nation’s SME report, March 2015

12 WHAT IS BUSINESS PROTECTION?DEBT Business Loan Protection The policy proceeds are used to help pay off any outstanding loans the business may have.. PROFIT Key Person - Profit Protection The policy proceeds are paid directly to the business to be used to help replace a Key Person and cover the loss of profits that may occur. The policy proceeds could help the business to continue trading. OWNERSHIP Share Protection On the death of a business owner the policy proceeds are paid to the remaining owners to buy the share of the business from the deceased's estate. So now lets looks at the different areas of business protection and what our research has revealed In our industry people love making things more complicated than they need to be but in reality when we are talking about business protection we are talking about 3 things, debt, profit and Ownership and we are going to use a term and or CIC policy and a trust form to cover this risk. We have a new kid in the block in the guise of RLP but this is not a true business protection policy but it is hugely important but we will come back to it. Debt Protection – this one is just common sense as it is with a mortgage why would you not protect a debt which could wreck your business. Profit we are taking about Key Person – We are trying to give the business breathing space should something happen to a key individual so the business does not need to make any rushed or rash decisions. You just need to identify who is key to the business and we will talk you through this later. Partner or director Share protection – what we are trying to do here is make sure that the company remains in the right hands and that we create a guaranteed market for the shares so both the beneficiaries and the company get fair value for the shares in the company in an easy and pre agreed process. RLP – been around for years but until 2009 were only available as a bolt onto a group scheme but then a way was found to use the legislation to develop what we now know as RLP and we came into the market in 2011 and now this one plan out sells the other three put together. I said we like to keep things simple and all we are talking about here is a term with a trust form for me the biggest fundamental thing to remember is that domestic term benefits from being written in trust for all the tax efficiency and speed of payment but with most business protection the policies will not work unless you get the trust side right. FAMILY Relevant Life Plan A tax efficient single life Death in Service benefit for employees or Directors of a business. The policy proceeds are paid to the Trustees (employer) and the benefit is written under Trust for the life assureds’ beneficiaries.

13 CORPORATE DEBT. Lets start with debt- Corporate debt is fairly common for businesses 57% of those surveyed ADMITTED to having some form of debt and this has increased since our research is 2011 which implies that getting finance is getting easier for SMEs but from what source? Amazingly 23% of this was secured via their credit card this is up from 3% in This maybe down to the banks not lending or perhaps the company just needing very short term borrowings but you need to ask about it. DLA accounts are up from 20% from our 2013 research again this maybe an indication that banks are still not overly keen on lending to SMEs. Over half the SMEs that we talk to, had borrowing of between £50,000 and £800,000 and the average was £344,000 so not an insignificant amount and one that could cause a business major cash flow issues if it needed to be repaid at short notice following the death of a business owner, the bank could recalled its loans or if the funding was via a DLA the family would want repaying . Source: Legal & General State of the nation’s SME report, March 2015

14 DIRECTORS’ LOAN ACCOUNTS.IS THE BUSINESS IN A STRONG ENOUGH POSITION TO REPAY THIS SHOULD A DIRECTOR DIE? Director loan accounts made up 33% of the corporate debt and the average DLA was £250,000. Worryingly 28% of business owners were unaware that these had to be repaid on death. For those business owners who knew they had to be repaid there was not much that they had any business loan protection to cover them. Begging the question where would they find the money if they needed to repay these loans. If you are a mortgage adviser then it is always worth checking for the reason for loans as if it is raising capital for business use it is likely that they are making a loan to their business and protection is needed. Private protection may not help the business as the widow could still demand the repayment of the loan from the company even though a private policy has paid out to her to cover the loan against their home. Source: Legal & General State of the nation’s SME report, March 2015

15 ATTITUDES TO UNFORESEEN RISKS.43% 29% 14% 12% 3% Business owner or key employee died or suffered a critical illness Premises damaged by fire Major contract lost IT security breach Premises broken into More than half of the businesses did NOT have Key Person Protection When running a business, most owners are focused on day to day delivery and doing the best for their customers. Unfortunately, this means they don’t always have the time to think about the ‘what ifs’ as Nigel said in the video earlier. Most of the points above will all form part of a business Disaster recovery plan and plans are put in place in case these occur except the biggest one losing a business owner or Key person with less that half of the SMEs saying that they have considered taking out Key Person protection. Source: Legal & General State of the nation’s SME report, March 2015

16 BEYOND THE PERCEPTIONS.STAFF 25% no impact INCOME 47% no effect on cash flow BRAND 63% no effect CREDITOR 58% no affect on creditor attitudes One of the biggest revelations within the research for me was the difference in perception and reality. When we first asked the question about how loosing a key Person would effect their business 25% said it would not effect their staff, over half said it would not affect their creditors 63% brand and 47% said it would not effect their income. But when we asked more questions on this point a huge 40% admitted that their business would not survive 12 months! Source: Legal & General State of the nation’s SME report, March 2015

17 TIME TO FIND & TRAIN A REPLACEMENT.£40K+ IN RECRUITMENT FEES Even if the business could survive without their key person we can start the discussion about the replacement costs and the profits that could be lost. Replacing key people can be harder and more costly than business owners realize. 60% of the SMEs we spoke to said it would taken them up to a year to replace a key person. A report by Oxford Economics released last year highlighted that on average it costs £40k to recruit a new middle management employee , accountant . And that figure is just the cost of recruitment, the cost of absorbing them into the business, and the cost of getting them up to speed. It does not include the far greater costs of things like lost revenue and lost expertise. The report also highlighted that on average new employees take 28 weeks to reach optimum productivity once they have started. The policy proceeds could help the business to continue trading by replacing loss of profits and cover the costs of replacing that key person Source: Legal & General State of the nation’s SME report, March 2015

18 BETTER KNOWLEDGE, GREATER AWARENESS.More than half of the businesses did not have key person protection. With Key Person we are looking at Profit Protection - The policy proceeds are paid directly to the business to be used to help replace a Key Person and cover the loss of profits that may occur and or replacement costs. We are trying to buy the business time so that they do not have to make rush or rash decisions. A business can continue to trade as long as they have cash flow and a simply Key Person policy can give them this time. A key things to remember with an SME is that a job title does not dictate responsibilities you could have a PA who actually runs the business and with out whom the business would collapse. Take a one man IFA their Para planner could be more key to the business than the IFA? So it is always worth digging deeper into the roles and responsibilities of owners and key staff to see exactly what they do and who would do this work if they were not there. The top thee reasons given for not having protection cover were that the business owners never thought about it, thought that they had enough staff or felt it would be too expensive. Now none of these, I would say, are barriers to having protection. They are much more around the need for advice, explaining the risks and potential implications and then the possible solutions which are bread and butter to any adviser. A Key Person policy can also be a great sales tool if you have clients who regularly do tenders as this could be included in their tender documents to show how professional the business is ………. Source: Legal & General State of the nation’s SME report, March 2015

19 16% had no idea what would happen – never thought about itSHARE PROTECTION. The research sample highlighted a level of uncertainty when it comes to share protection, and what would happen if a shareholder died. Moving on to Director Share protection, there were some real concerns in our finding, for example over half of business owners either had no will or made no reference to their shares in their will. Now on the face of this you might say well the shares will go to their wives or husbands but consider what might happen if they were not married (first 250k goes to partners rest goes to other family members children and parents) or if they both died the shares could get tied up in probate for months and if this was a controlling share of the business this could lead to all sorts of issues. Then you have 16% said that they had no idea what would happen So lets explore some of the options or assumptions that business make such as 20% saying their beneficiaries would join the business. If a shareholder died 16% had no idea what would happen – never thought about it 20% acknowledged that beneficiaries would become active in the business Source: Legal & General State of the nation’s SME report, March 2015

20 WHAT WOULD HAPPEN TO THE SHARES IF A SHAREHOLDER DIED?Half the respondents assumed that if one of the business owners was to die the remaining shareholders would buy the business or their partner would join the business but have they had these discussions and how would they feel about this. In the vast majority of cases you will be the first person to have asked them this question and you will usually find that they have never really considered it. Other responses were 9% said beneficiaries would keep shares and benefit from the income without taking an active role in the business and the best one for me was 7% said our beneficiaries would get nothing and the shares would pass to the other business owners….. Glad I am not on of their loved ones! But lets take a closer look at the top and the bottom one here Source: Legal & General State of the nation’s SME report, March 2015

21 WHAT WOULD HAPPEN TO THE SHARES IF A SHAREHOLDER DIED?30% Of Partners/Shareholders would buy the remaining shares. For the 30% who assume that the fellow business owners would buy the shares If they wanted to retain control of the business and buy the shares, where would this money come from? And How much will the shares be worth? 22% said they would rely on a life policy but is it set up in a tax efficient manor and allow them to retain Business property relief. 28% would take out a bank loan but could they? will the bank want to lend to a company who has just lost a major share holder who could have been key to the business? Source: Legal & General State of the nation’s SME report, March 2015

22 WHAT WOULD HAPPEN TO THE SHARES IF A SHAREHOLDER DIED?For those who did not know what would happen 60% have never thought about it which goes back to what I said a little while ago in the vast majority of cases you will be the first person to have asked them this question and you will usually find that they have never really considered it. All these are shouting out for advice as opposed to any resistance to the protection. Saying it is covered in their articles of association is an interesting one Click 16% Don’t know Source: Legal & General State of the nation’s SME report, March 2015

23 SHARE PROTECTION. Only 4 out of 10 partnerships / limited companies have reviewed their partnership agreement or articles of association in the past year Partnership 32% Limited companies 26% Not reviewed their partnership agreement since the business was started Not reviewed their articles of association since the business was started Many companies do not review their articles on a regular basis let along know where they are!! 60% have not reviewed their articles in the last 12 months and 26% have never reviewed them so how would they know what is covered in them. Partnerships are worse still with a massive 32% having never reviewed their agreements. Articles can have some very interesting clause in them going from not mentioning what would happen to shares of death through to cancelling them. If you want more information on this we do run a course where we looks at articles in much more detail. Source: Legal & General State of the nation’s SME report, March 2015

24 Heard of relevant life plans?Least likely to have heard of RLP 88% Small businesses with value under £250,000 79% Businesses set up within the last 2 years 78% Businesses set up over 10 years 77% All male business owners After a brief explanation of Relevant Life Plans for those who had not heard of it - 62% were receptive Only 10% said they would definitely not take out cover Finally we come to the new kid on the block in the guise of RLP. RLP’s now out sell all other forms of business protection put together and is still the best way to break into the business protection market. Only 28% of business owners had heard of RLP and half of those had actually taken one out, not a bad conversation rate. With those who had not heard of the plan we gave them a very brief description and then asked them if they would be interested in hearing more 62% were very receptive and only 10% said that they would not be interested in hearing more. So if we can do that with a couple of lines think what you could do in a sales meeting. Source: Legal & General State of the nation’s SME report, March 2015

25 Don’t know enough about itRELEVANT LIFE PLAN. Reason for not taking out relevant life plans 31% Did not see the need for it 27% Don’t know enough about it 21% Don’t understand it 21% Have Death in service 11% Not interested in tax efficiency For those who had heard of RLP but had not taken one out, their reasons mainly hung on advice or should I say lack of it. But interesting only 5% had the issue that their company would not pay for it which is strange considering 98% of those who have taken one out with us are company directors so if they are the ones who would authorize this! I liked the 11% who said that they were not interested in tax efficient life assurance. Company would not agree to pay for it 5% Source: Legal & General State of the nation’s SME report, March 2015

26 WHAT ARE YOUR POTENTIAL CLIENTS NEEDS?Our research has highlighted these changing needs which can help businesses to identify their likely risks New Business (< 2 years) Would they survive the loss of a key person? 46% would cease trading immediately Young and maturing (2-10 years) Could they repay their debts if an owner died? They are most likely to be reliant on bank lending – they have % corporate debt and 14-17% director loan accounts Established (10+ years) What would happen to their shares on death? Highest response in our survey was “don’t know” Neg Pos Business growth As part of the research we also looked at the different needs a company has as it grows, in various stages of development the needs for protecting it will change and this can give you some useful insight and you can make some assumptions depending on the age of the business you are going to see. In the early stages of initial development it may be reliant on just a few key people, however as it becomes more established then the use of loans will play a bigger part. Finally, as it moves to an established position or towards maturity then the continued ownership of the business will be a point for consideration as the owners will be more concerned with protecting its value to boost their retirement planning. Source: Legal & General State of the nation’s SME report, March 2015

27 FINANCIAL ADVICE. The use of professional financial advisers varies by business type, value, tenure and gender mix of the business owners. Finally we asked about how they want to learn about business protection and what relationship businesses had with solicitors accounts and advisers. 82% of businesses had an accountant compared to just 49% who had a financial Adviser. Of those businesses that had an adviser they either approached the advisers themselves or were introduced by their solicitor or accountant. There was not much evidence of advisers approaching companies directly. Interesting companies with mixed gender ownership and those with a value of more than 1m were more likely to have an adviser (60%) and those least likely were sole traders and those with a value up to 250k. But for me the real golden gem of the whole report was that of the business that had business protection 89% took it out because they were advised to do so it was not through some self recognition of the risk. This ties in with the top reasons for not having taken out protection which were, “did not see the need for it” / “had not considered it” or no one had advised us that we should have it. Again back to the video I showed at the beginning of this session with Nigel and Dean. Source: Legal & General State of the nation’s SME report, March 2015

28 FINANCIAL ADVICE APPROACH.Of those businesses that had an adviser they either approached the advisers themselves 29% or were introduced by their solicitor or accountant. There was not much evidence of advisers approaching companies directly. Source: Legal & General State of the nation’s SME report, March 2015

29 BUSINESS PROTECTION REPORT.We have produced our report in this e design PDF making it very easy to use online as opposed to just an e version of our printed report which will be available to order from the 7th April. I hope you find it a useful tool for speaking to your business clients or indeed your clients who own businesses and you can help us get Business assured in 2015. Source: Legal & General State of the nation’s SME report, March 2015

30 PRESS COVERAGE.

31 SUPPORT FROM LEGAL & GENERAL.If you can’t make it to one of our workshops Head over to our adviser centre and see for yourself the wide range of support material available to you We have a host of support on our dedicated website which will help you get started, refresh your knowledge and support you in your discussions with your clients. Our latest news section will keep you up to date with anything new that we have done Our listen to the Expert section has CII accredited videos on an Introduction to Business protection, Key Person Cover and Share holder protection along with help with first appointments to Financial underwriting On our calculator page you will find calculators for valuing a business, working out the cover for a key person to the tax savings on an RLP Under the basics you will find everything you will need to kick of your knowledge We have client stories and testimonials which you can use with clients or to understand why business owners have not taken out cover And finally our Priority protection Promise where we explain how we will treat your HNW cases and how we can match our competitors premiums when we are not the cheapest but you want to use us. Just go to our adviser site and click on business protection or just google legal and General business.

32 LEARNING OBJECTIVES. 1 To quantify the business protection opportunity for advisers and how they can best develop this market by exploring the demographics of UK businesses and how business protection fits into their context. 2 Understand business owners’ attitude to risk within the context of business protection and the risk areas that business protection products protect. 3 Understand the UK corporate debt landscape, the need for key person cover, share protection and business owners attitudes towards it. Over the past six years we have conducted three waves of research into business protection to gain insight into the market and the risk businesses face. We’ve found that year on year there is clearly a lack of awareness of business protection, among business clients showing that businesses have not evaluated the potential risks. To be honest I do not thing that this lack of awareness is limited to clients as many accounts have limited knowledge and few advisers operate in this market so I guess it is no surprise that the SMEs themselves have not considered the risks and asked themselves - What would happen to a business if the owner suddenly died? A key employee was unable to work? Could either of these put terminal pressures on the businesses bottom line? With the right knowledge, businesses are better placed to make the right decisions in protecting themselves against certain unexpected events. This begins with adviser/client conversations and properly evaluating the risks a business faces. It’s all about helping to Get Business Assured. Within our research we asked over 800 business owners some very leading questions which I hope will help you start these conversations with your business clients.

33 SUPPORT FROM LEGAL & GENERAL.Business Protection apply online Business Protection website: - Technical Guides - Online calculators - Marketing and seminar support material Client facing and claimant videos On-going technical training and workshops on business protection Useful contacts: Technical enquiries - Underwriting enquiries -Tel: Over the past six years we have conducted three waves of research into business protection to gain insight into the market and the risk businesses face. We’ve found that year on year there is clearly a lack of awareness of business protection, showing that businesses have not evaluated the potential risks. What would happen to a business if the owner suddenly died? What if the majority shareholder was diagnosed with terminal cancer? With the right knowledge, businesses are better placed to make the right decisions in protecting themselves against certain unexpected events. This begins with adviser/client conversations and properly evaluating the risks a business faces. It’s all about helping to Get Business Assured. Technical training Workshops Webinars

34 STATE OF THE NATION’S SME’S REPORT. IT’S ABOUT GETTING BUSINESS ASSURED.THANK YOU FOR YOUR TIME Source: Legal & General State of the nation’s SME report, March 2015