Richard Taylor and Rupert Connor explain the need for life assurance in business, namely, protecting main assets and shareholders.

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 disastrous implications in the event that one of you die prematurely or become ill and cannot work. Detailed below are some different scenarios that you should consider.

Shareholding directors

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

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 dependents. This could affect the company in two ways:

The dependents 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?

Or, they might prefer to receive the value of their shares in cash. But who will buy them? Unless the other shareholders have sufficient liquid capital reserves, they may be sold to a possibly hostile, third party, perhaps even a direct competitor.

Minority shareholders
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 dependents 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 provides money for the surviving shareholders to purchase the deceased shareholder’s 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, its very survival could be at stake.

Key man (or woman!) 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 man 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 May 1, 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 in Cambridgeshire, a few hundred yards from home, after a trip to see Chelsea football club lose to Liverpool in a Champion’s League semi-final.

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 and it began talks with its banks over £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 £63 million stake, while the Corus pension fund took a £15 million hit from the collapse.

It shows what an important man Phillip Carter was to the company and it has been highlighted that 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 interim leaders of the business some breathing space whilst deciding how best to proceed.

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 men are likely to be to the profitability and longevity of your company.

Rupert Connor and Richard Taylor are independent financial advisors with Acuma Wealth Management. As qualified advisors in the region, they help expats get their finances in order, and maximise the financial opportunities available offshore and plan for future events.