If a co-director or partner in your business died, could you compensate their estate and stay in business? Well there is insurance for just that…
One area that exercises business owners is business continuity in the event of something going wrong. As a result, we take out insurance to cover such events – we think of damage to buildings, the impact of accident or theft involving company vehicles and we also consider liability insurance for a range of scenarios.
And then we get on with running our businesses! Marketing our business, building new client relationships, delivering our services or selling our products and then meeting and hopefully exceeding the expectations of our customers so that they return time and time again.
And all of these customers facing activities are supported by our back-office activities in finance, managing our people and generally keeping the show on the road.
What sometimes gets forgotten though is the impact on the business if something happens to someone in the business – after all, your people are the engine of your business. If something happens to a key employee, this can be very damaging for your business. However thankfully, you can ensure that your business can continue in the event of something happening to one of these key people.
There are a number of different types of business insurances, probably the most important ones are described below.
This insurance is very important where there are directors in the business who are also shareholders of the business.
When there is Co-Director Insurance in place, in the event of the death of a director, the remaining directors (or the company itself under a Corporate Co-Director’s Insurance policy) can buy out the shareholding of the deceased director.
This is really important, because when a director dies, his/her shares will typically pass to their family. They will usually want to then protect that asset (their shareholding), and seek to become involved in the business themselves.
This often causes angst and tension among all parties, as the new directors lack the business acumen and experience of the deceased director.
This insurance mitigates this situation by providing a payment to the deceased’s family in return for their shareholding. As a result, it enables a deceased director’s family from having to become involved in the business, where they may have no desire or experience to do so.
This insurance also enables the company to control it’s own destiny, should such an unfortunate and unforeseen event occur. The deceased’s family are fairly compensated and the remaining directors retain control of the ownership and direction of the business – a best-case scenario for all concerned.
We read some research recently from BDO Simpson Xavier who identified that 72% of businesses cease trading within 5 years of the death of a business’s founder, often because the remaining directors/partners simply don’t have the financial resources to compensate the deceased colleague’s estate and keep the business going forwards.
This is somewhat similar to co-director insurance, but for people who are engaged in professional partnerships, such as solicitors or accountants.
These professionals who work together outside of a company structure also need to consider what would happen in the event of the death of one of their partners.
Because on death, the deceased partner’s share of the partnership immediately becomes part of their estate, which could be called upon as a debt by the deceased partner’s survivors.
This potentially could create enormous issues for the remaining partner(s) who would need to immediately raise finance in order to buy out the deceased partner’s share.
Thankfully partners can protect themselves against this risk. Each partner can take out partnership insurance on the lives of their partner(s).
Should one partner die, the remaining partner(s) now have immediate access to the necessary capital to buy out their deceased partner’s share of the firm. The deceased’s family are looked after and the firm can continue to grow.
Of course it is vital to protect your physical assets; your premises, your vehicles and your stock and to ensure you can adequately manage any other potential liabilities.
But it’s your people who keep your business growing. They are the most important asset to protect.
Key Person Insurance
It’s also not at all unusual to have one or two key people in a business, who are not shareholders in the business.
They may simply be very important employees with specialist talents or expertise that the business relies upon heavily. To lose such a person could be very damaging to the future of the business, as their input is so key.
Businesses can protect themselves against the loss through death or illness of such a person through a Key Person Insurance policy.
These policies enable the business to survive such a loss, by providing a cash lump sum for the business in the event of something happening to this person.
This will give the business time to possibly find and hire a replacement or to make changes within the business to reduce the impact of the loss of the key employee.
This insurance often prevents a business going into a downward spiral after the loss of a key person.
About The Author…
Michael Geoghegan QFA CFP, previously of Canada Life and The Irish Government Foreign Affairs Dept., is the Managing Director of Agathos Financial Planning. At the top of his field for nearly 20 years, he is a renowned expert in taxation and trusted adviser to some of Ireland’s wealthiest individuals and businesses.
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