The MVP (Most Valuable Protection).

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Business Protection – Protecting Your Income Source!

Financial Planning in its essence deals with individuals and families and their long-term financial goals. However, a large majority of my clients tend to be business owners or professionals and I am continually amazed at how often the protection of their source of your income is overlooked.

Business Protection should in no doubt be the cornerstone of any business that has either key employees that are paramount to the continued success of the business, professional partnerships such as a solicitors practice or a doctor’s practice or any company that has shareholders.

This can seem to be an area of life insurance that appears quite complex but essentially, depending on the structure of your business it provides capital to maintain the future of the business if any of the key people were to suffer a serious illness or die prematurely.

Statistically speaking, the risk of losing a shareholder, partner or key person through death or serious illness may be a lot higher than you think with a one in four chance of death before retirement and a 60% chance of serious illness before 65 years of age. This is a sobering fact when you consider that over 90% of business failures result from management breakdown after the death or serious illness of a co-director, partner or key person.

How can you protect your business?

Personal and Corporate Shareholder Protection:

The death or serious illness of a shareholder can have major repercussions for the future of your company. It can cause immediate financial hardship for the remaining shareholders and maybe even loss of control of the company. In essence, the death or serious illness of a shareholder can potentially jeopardise the future of the company and can have major implications for the remaining shareholders.

On death a shareholder’s shares normally pass to their next of kin and the next of kin become new shareholders in the company. The change in share ownership can lead to potential problems for both the next of kin and the remaining shareholders. The next of kin may not want to become involved in the company and may want to sell their shares as soon as possible. The remaining shareholders may want to retain full control and ownership of the company and may not want to work with a new shareholder.

A Shareholder Protection plan can help avoid these problems.

What are the consequences of not having a shareholder protection plan in place?

  • The remaining shareholders may not have the capital required to buy back the shares from the next of kin. They may be forced to take out substantial personal loans in order to retain ownership of the company.
  • If the remaining shareholders are unable to acquire the required capital sum they will be forced to take on the deceased shareholder’s next of kin as new shareholders in the company.
  • The next of kin may be unable to sell their shares if the Company’s Articles of Association does not allow the sale of shares to an outside party and the remaining shareholders cannot afford to buy them.
  • The next of kin may be unable to get a fair price for the shares on the open market.

Shareholder Protection is the solution and a plan would consist of the following:

  • A legal agreement – that on the death of a shareholder their shares are bought back from their next of kin.
  • Life Insurance – to provide the financial capital required to buy back the deceased’s shares from their next of kin.

Key Person Insurance Cover:

 Hard-working, creative and valued employees are the most powerful assets available to your business. That’s why it makes sense to protect against the loss of certain key members of staff, bolstering your company against the financial and operational fall-out of such an event.

The future profits of your business may be at risk!

A Key Person can be defined as any “key” employee, director or consultant on whom the business depends for its continued success, or existence, and on whose death or serious illness the business could suffer a financial loss.

What are the consequences of not having a plan in place?

  • The business will have to survive without that person’s unique skills, business contacts, management experience or intimate knowledge of your business. This may result in a reduction in service standards and a loss of confidence by both customers and suppliers.
  • Bank loans could be called in if the key person had given a personal guarantee.
  • There could be a withdrawal or reduction of credit facilities by banks or suppliers who are concerned about the future of your company due to the death or serious illness of the key person.
  • Loans made by the key person will have to be repaid.
  • Additional costs of recruiting a suitable replacement (if one can be found).

Putting Key Person Insurance in place can help your business overcome the financial repercussions of losing a valued member of your staff.

What is Key Person Insurance and how does it work?

Key Person insurance is life insurance effected by the business on the life of one of its employees or directors with a view to compensating the business for an anticipated financial loss in the event of the death of the individual covered. Key Person Insurance can also be effected to provide a lump sum payment to the business in the event of a key individual suffering a serious illness. The lump sum benefit will compensate the business for any loss of profit or can be used to repay loans or recruit a suitable replacement.

Partnership Cover:

Is the future of your business at risk?

The death or serious illness of a partner can have major repercussions for the future of your business. It can cause immediate financial hardship for the remaining partners and maybe even loss of control of the business. In essence, the death or serious illness of a partner can potentially jeopardise the future of your business and can have major implications for the remaining partners.

Why do you need a Partnership Insurance plan?

Often a partner’s share of the business will be the single largest financial asset he/she owns. On death their next of kin may expect a substantial and immediate payment from the remaining partners which might include:

  • Any capital that the partner had invested in the business.
  • The deceased partner’s share of undrawn profits.
  • Payment for the partner’s share of the goodwill.
  • Any loans that the deceased partner had given to the business.

A Partnership Insurance plan can provide the necessary funds required by the remaining partners to meet their financial obligations.

What are the consequences of not having a plan in place?

  • The remaining partners may be forced to take out substantial personal loans to make a payment to the deceased partner’s next of kin in lieu of their interest in the partnership.
  • If the remaining partners are unable to acquire the required capital sum they may be forced to take on the deceased partner’s next of kin as their new partners. This may not be in the best interest of the business.

What is Partnership Insurance and how does it work?

A Partnership Insurance plan consists of two parts:

  • A legal agreement – that on the death of a partner the remaining partners will buy back the deceased’s share of the partnership and the next of kin will sell their inherited share to the remaining partners.
  • Partnership Insurance – to provide the financial capital required by the remaining partners to buy back the deceased’s share from the next of kin.

What are the advantages of such a plan?

  • The plan benefits both the remaining partners and the deceased partner’s next of kin. It can be set up in a tax efficient manner with remaining partners owning the deceased’s share without paying inheritance tax.
  • A capital lump sum will be provided to the remaining partners to buy back the deceased partner’s share of the business, ensuring the remaining partners retain full control of the business.
  • The deceased’s next of kin can rapidly realise the value of the deceased partner’s share of the business as a capital lump sum.

Of course it is important to point out that there are many legal and taxation implications to setting up such plans and that is why it is important to speak to a Certified Financial Planner who can advise you of the correct structure for your business.