Failure to protect your company, partnership and key staff could have disastrous implications in the event that one of you dies prematurely or becomes ill and couldn’t work. You can’t stop the unexpected from happening but, with planning, you can reduce the impact it has on you and your business and your profits.
Serious illnesses, such as a heart attack, stroke and cancer, no longer result in death but require lengthy periods of convalescence. The insurance contracts can be written that would provide money for this eventuality as well as death.
Protection for key employees
All businesses have key people such as those whose particular skill, knowledge, leadership or experience contribute to the company’s continued financial success.
Such individuals may be a partner, your 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.
A key person insurance contract would provide funds on the death or disability or a key person in order to repay debt, replace lost business income or pay for recruitment costs/ temporary staff.
Protection for Shareholding directors
The death or illness of a shareholding director could have a serious impact, both on the future of your business, its profitability and on your 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 not share the objectives that the surviving shareholders have for the business and may even want to take the business in a different direction.
If they prefer to receive the value of the 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 provision of funds through an insurance contract on death or disability of a business owner or partner in order to enable the co-owners to purchase their interest in the business or compensate the business owner or their family staff.
Protection for Partners
The partnership may have debts that are repayable on the death or critical illness of a partner, which may include a proportion or all of; bank overdrafts, hire purchase agreements, bank loans and a partners capital account.
A suitably structured Partnership protection strategy would ensure that the business remains in control of the active Partners, whilst at the same time greatly assisting the dependants of the deceased Partner.
This basis of this 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 be made immediately available to the trust beneficiaries.
Smith & Williamson has many years of experience in arranging cover to protect businesses against such eventualities. Care must be taken in selecting a suitable product and a suitable provider in order 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
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.