Key Person insurance is one of the most overlooked risks that business face. There is a 22% chance that one of two business partners aged 40 today, will die before age 65. Most businesses are happy to insure their machinery, they’re premises and their public liabilities yet they often don’t think about the very real risk of key personnel becoming seriously ill or even dying. So, what could happen to the business in this scenario?
This could sink the business instantly. If a person had offered a personal guarantee on a business loan and then subsequently died, the bank may move to call in their loan early. If the business doesn’t have enough liquid assets available, it may have to sell profitable assets to cover the loan or even close up shop altogether!
The bank may call in the loan irrespective of whether the deceased was a guarantor or not. They may take the view that the business is no longer viable because of the loss of the recently deceased person, and they wish to recover their money while they still can.
You can insure the lives of key personnel for the specific purpose of paying off company loans in the event of their deaths. The Company would pay the premium and own the policy. The premiums are not tax deductible however, but the benefits are free of tax in the hands of the company.
It can feel a little callous to think on these terms. Business is primarily about people and losing colleagues to a tragedy is an extremely sorrowful ordeal. But as a business owner or director, you have a responsibility to protect the business and all its stakeholders from the risks that they face.
What if you lost your top salesman tomorrow? What if they had personal relationships with important clients and now these clients start to shop around?
Or maybe you lost your top developer or R&D expert. Their expertise will be difficult to replace and will be an expensive endeavour to recruit a replacement.
You can insure the lives of key personnel for the loss of profits or the cost of their replacement in the event of their deaths. The Company would pay the premium and own the policy. The premiums are tax deductible if certain conditions are met. The benefits are liable for tax.
Without any agreements in place, the estate of the deceased will have claim over the deceased’s shareholdings. The remaining directors or partners might be faced with having to deal with the deceased’s children or spouse. This can cause an unholy mess for both the family and the directors.
Maybe the family will sell their shareholding to a competitor. Maybe the family can’t get a fair price from the remaining shareholders, or maybe the company doesn’t have the funds to buy back the shareholding.
Or what if the son or daughter who has inherited the shares, doesn’t want to sell the shares and they fancy themselves as a company director with no real experience?
This will depend on the legal structure of the business. It will be a combination of legal agreements, such as buy-sell double options and life insurance contracts. Speaking in general terms, the company/directors/partners can take out life insurance policies that will pay the deceased’s estate a certain value in exchange for the deceased’s share of the business.
A buy-sell double option gives the estate the option to sell the shares at an agreed price and the company also have the option to buy the shares at an agreed price. The insurance contract is in place to fund this transaction. Having the buy-sell double option in place means that either the company or the estate can force the deal by exercising their option.
If you are in the market for this type of protection make sure to contact a good financial advisor as this is a specialised piece of work.
For more info on this type of protection or to book a free initial consultation with me, drop me a line at email@example.com
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