Following the part one article regarding life assurance, Richard Taylor and Rupert Connor, Chartered Financial Advisors, Acuma Wealth Management, bring you part two of the series, and give the case for life assurance in business and protecting your main assets.
Life assurance continues to be massively under-bought and under-sold, often with disastrous consequences. If you are in business, failure to protect your company, partnership and key staff could have devastating implications in the event that one of you dies prematurely, or becomes ill and unable to work. Detailed below are some different scenarios that you should consider:
Shareholding directors of a private limited company
The death or permanent disablement of a shareholding director could have a serious impact, both on the future of your business and on your family. So what are the main points you need to consider?
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. This could affect the company in two ways:
- The defendants now have the right to a say in the running of the company. But, do they have the necessary experience? And will they share the objectives that the surviving shareholders have for the business?
- They might prefer to receive the value of the shares in cash. But who will buy them? Unless the other shareholders have sufficient liquid capital reserves, they may be sold to a possible hostile third party, perhaps even a direct competitor.
Generally, it is the voting rights attached to a shareholding in a private limited company that gives them their market value. Minority shareholdings may not have significant rights, and so the shareholder’s dependants may inherit shares that are virtually worthless. The only likely buyers of such a holding would be the surviving shareholders, but they may be under no obligation to buy.
The simple answer to both of these scenarios is shareholder protection. A legal agreement is signed by all of the shareholders, who agree to sell their shares in the event of their premature death, and an insurance contract(s) provide money for the surviving shareholders to purchase the deceased shareholders equity.
Don’t forget key staff
As your business is ultimately your people, its continued success may also depend on the special contributions made by a small number of key men and women. Your fellow directors or partners should also be regarded as key people. The death or disability of any of them could threaten your company’s profitability. Indeed, the very survival of the company could be at stake.
Key people insurance
The premature death of a key employee is likely to cause an immediate requirement for cash, so life assurance should be a top priority. However, it is not just the death of a key employee that can create serious financial burdens for your company.
Today, many serious illnesses, such as a heart attack, stroke and cancer, no longer result in death, but require lengthy periods of convalescence. A key person insurance contract can be written on the lives of key staff that would provide money for this eventuality.
In case you remain unconvinced, perhaps a real life example in the form of the tragic death of training tycoon Phillip Carter in a helicopter crash on 1st May 2007, and the devastating impact Carter’s death had on his business may help change your mind.
Carter, his teenage son, best friend and the pilot were all killed when his helicopter crashed a few hundred yards from his home. Following the disaster, shares in Carter & Carter, a national provider of apprenticeship games, plunged and the company issued three profit warnings before its shares were suspended. It then began talks with its banks over GBP 130 million of debts. By March 2008, it was heading for administration with the loss of 2,000 jobs.
Fidelity International, the firm’s biggest investor, reportedly lost its GBP 63 million stake, while the Corus pension fund took a GBP 15 million hit from the collapse.
This example shows what an important man Phillip Carter was to the company, and how the collapse of his business may have been avoided had sufficient key man insurance been in place. At the very least, it would have provided the businesses interim leaders some breathing space, whilst deciding how best to proceed.
Once again, not an especially pleasant topic to consider, but of vital importance to anyone serious about their business. These things do happen, as highlighted in devastating detail by the Phillip Carter example. If it can happen in a listed company that counted Fidelity as a major shareholder, then it can almost certainly happen in your business.
The smaller your business, the more vital your key employees are likely to be to the profitability and longevity of your company.