1 Who are your key people?
Every business relies on people who are absolutely vital to their day-to-day operations and profitability. If these key players become incapacitated or, in the worst-case scenario, pass away, you need a contingency plan that will inject financial support into the business to ensure continuity, survival and profit.
2 What can happen if you lose a key person?
The loss of a key person's skill, insight and connections can be potentially disastrous for a business. Typically, there is a scramble to find a suitable successor before a period of adjustment, which can vary wildly in duration, sets in. The danger of recruiting a less capable replacement is also very real. Then there's the expense of pinpointing and training to consider.
3 The dangers
Swift action is necessary. Clients may refuse to do business and lapse into a "wait and see" syndrome until they are satisfied that the loss is resolved. This is when competitors start circling in a bid to lure customers away. In extreme cases, the loss of revenue coupled with a clampdown on credit facilities may result in the business being forced into liquidation. It should be noted that the cost of protection is a minimal fraction of turnover and should form a part of any annual insurance budget.
4 Protect your talent
The most astute move is to take out life insurance policies for your key people, which is paid for through the business. This means money is available as a safety net in the event of the loss of a key person. All the proceeds of the policy go to the business and, ultimately, protect it from unexpected and normally unprovisioned costs. This enables continuity, protection and protection of profits.
5 Partners and directors
The loss of a key man can put a strain on the business, but the loss of a shareholding director can prove catastrophic as control of the business can move outside of the boardroom to non-associated members of the deceased's family. For partners and directors, it is advisable for each to take out their own life insurance policy equal to the amount of the value of their shareholding. These polices are then placed in trust and benefits are paid to the surviving business partners to buy back the shares and retain control of the company.
6 Other alternatives
Alternatively, each partner can take out a policy on the other partners' lives with an agreement in place to govern the redistribution of shares. In both cases, the business retains control and the departing shareholder's family is compensated for their loss.
7 Why this is important
Policies of this nature ensure there are adequate funds available to the other parties to buy out the deceased share of the business. The cost of such provisions is usually less than 1 per cent of turnover, yet provides the remaining parties with total peace of mind that they are not at risk of an inappropriate member of the deceased's family taking control of their business interests.
8 The next step
Discussing such policies with an independent financial adviser is important to ensure that the right amount of life cover is put in place using the most suitable policy.
Gary Lunn is a director of Nexus Insurance Brokers