News/Events

Protecting Against the Loss of Key Personnel [4th September 08]

There is little doubt that a gap exists in the UK protection market as many thousands of small to medium size business are operating without any life cover for their respective owners.

Most companies understand the need to insure their premises, contracts and vehicles, but many overlook the protection of their key and most valuable assets – people.

The simple fact is, without certain key people, many businesses could suffer serious financial loss or possible cease trading altogether. This not only applies to death but also losing key people through a serious illness.

It makes little difference as to whether it is a family run village store or a large network of garages with car showrooms as every business of every type and size has a requirement for some form of business protection. Without doubt, there will be an individual or indeed individuals who make a major contribution to its profitability, whether it is the Managing Director/the Proprietor or someone with unique skills. Often, an individual’s value to the business will be reflected in their remuneration package which is a good indicator as to whether they are key to that company.

If a key person should die, here are some of the problems:-

• Loss of profits

• The need to recruit and train a successor

• Maybe problem in securing finance for new ventures, expansion etc

• Having to repay a loan the key person has made to the company

• Loss of personal connections

• Loss of goodwill

The immediate solution is life cover and is effected on the life of the key person in order to provide financial protection against the problems mentioned above. It is designed to give the company a cash injection should the key person covered die or have a serious illness (when this specific option is taken).

Not only is there key person protection but also Share Protection so that the remaining shareholders or Partners can buy out the deceased’s share in the business. And then there is Loan Protection where the company has taken out a business loan to expand or buy plant and machinery and needs to ensure the repayments can be met whatever happens and preferably to have the loan repaid.

A simple example would be a husband and wife running a small business and who have borrowed money from the bank to buy some new equipment. Both would, firstly, be at risk if something happened to the other and continuing to run the business successfully and, secondly, cover is needed to repay the outstanding loan.

Not so straightforward, I met recently with a Director of a large firm of Estate Agents where the Directors were concerned about the influence their Chairman had in the Company’s profitability and also their own positions. It was agreed that they should all take out share protection in the form of a life insurance policy for each and also arrange a Cross-option agreement. The policies were written in Trust for the benefit of the surviving shareholders and should the Chairman unfortunately die, the agreement would come into force and ensure his Estate receives the full value of his shareholding and control of the Company would revert wholly and immediately to the remaining Directors.

This is a complex area and you should seek advice from a qualified Independent Financial Adviser.

This article was written by Langtons - Published in the Western Morning News, Money, 4th September 2008