Protecting your business against the death or illness of a key employee, partner or shareholder – ignore at your peril, says Matt Haswell.
Failure to protect your company, fellow shareholders or partners and key staff could have disastrous consequences in the event that one of them dies prematurely or becomes ill and can no longer work. Serious illnesses can require lengthy periods of treatment or convalescence. You can’t prevent the unexpected from happening but, with planning, you can reduce its impact on you, your business and your profits. A wide range of insurance contracts are available to cushion the blow if the worst happens. Broadly, there are three main kinds of business protection.
Protection for shareholding directors
The death or illness of a shareholding director could have a serious impact on the future of a business, its profitability and on the director’s family.
Majority shareholders may have important voting rights that directly affect the running of the company. In the event of a majority shareholder’s death, these rights would normally pass to the deceased’s dependants.
The dependants now have the right to a say in the running of the company. But do they have the necessary experience? They may have very different objectives for the business to the surviving shareholders and may even want to take the business in a different direction.
If they would prefer to receive the value of their shares in cash, who will buy them? Unless the remaining shareholders have sufficient liquid capital, they may be sold to a possibly hostile third party, perhaps even a competitor.
The solution
The provision of funds through an insurance contract on the death or disability of a business owner/partner to enable the coowners to purchase their interest in the business or compensate the business owner or their family.
Protection for partners
A partnership may have debts that are repayable on the death or critical illness of a partner, which may include a proportion or all of a bank overdraft, hire purchase agreement, bank loan or a partner’s capital account.
The solution
A suitably structured partnership protection strategy would ensure that the business remains in the control of the active partners whilst, at the same time, greatly assisting the deceased partner’s dependants.
The basis for this type of strategy is for each partner to effect a life assurance policy on their own life and for the policy to be placed into a specially designed partnership trust arrangement in favour of the remaining partners. In the event of the partner’s death the policy proceeds would immediately be made available to the trust’s beneficiaries.
Protection for key employees
All businesses have key people whose particular skills, knowledge, leadership or experience contribute to continued financial success. They may be a partner, chairman, managing director, IT specialist or a sales director with irreplaceable contacts and relationships. The death or disability of any of them could threaten your company’s profitability. Indeed, its very survival could be at stake.
The solution
A key person insurance contract provides funds on the death or disability of a key person in order to repay debt, replace lost business income or pay for recruitment or temporary staff.
What to watch for
When arranging cover to protect businesses against such eventualities, great care must be taken in selecting a suitable product and a suitable provider so that:
- competitive premiums are secured
- cover is arranged with the minimum of underwriting
- tax efficiency is maintained
- the policy is written on the correct basis with suitable trust documentation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.