BUSINESS INSURANCE
Just as Personal Life
Insurance is purchased to shield a family from the financial loss
incurred by the death of a breadwinner, so business assurance is
acquired to protect a business enterprise from the financial loss
brought about by the death of a principal or some other key person.
In many instances people in the ownership - (management group)
-carry all their eggs in one basket as their business holdings and
their personal assets are tied together, if not identical. A
business failure precipitated by death would be just as disastrous
to their personal estate as to the business.
Personal life insurance has always been sold on the premise that a
parent is a key person in the family unit and that his or her death
would invite financial disaster. Business insurance is based on the
fact that the owner/managers or small number of employees are key
people within the business enterprise and that the death of any one
of them could weaken, and might wreck the business.
Briefly the principles are as follows:-
- To provide cash for the purchase of the interest a deceased associate has in the business enterprise and prevent it from falling into other hands.
- To decrease the financial loss to a business in the case of death of a member of the enterprise whose business ability, technical knowledge or financial resources are necessary to the prosperity of the business.
- To provide retirement funding for the business owner or key employee.
- To retire debt. Generally secured twice, by mortgage over business assets and by personal guarantee.
In the conservation of businesses, business people are usually well
aware of the need to arrange many forms of insurance- fire,
burglary, public liability, motor vehicle insurance and so on but
none of these defend against the loss or destruction caused by
permanent removal of the most valuable resource of all - people,
upon whom the whole fabric of business rests.
Many business people do not fully appreciate the serious problems
that can arise following a death and do not recognise the need for
business life insurance. So if business people are to come to grips
with the human protection side of their business they need the
unbiased advice of KSL, who have the expertise to recognise the financial problems
that may exist.
The solution to Business Insurance needs to comprise three main components:
1. A Buy and Sell Agreement
This agreement establishes the basis upon which an owners share in a
business will be treated upon that owners departure from the
business. The agreement is a contract where each business owner
agrees to sell their share of the business upon death, retirement or
disablement for a predetermined price (or agreed valuation method).
The fundamental benefit of the buy and sell agreement is that it
provides a certain future for the family of the departing owner and
for the remaining business owner in the event of death, retirement
or disablement of a partner.
2. Financing for the Agreement and Other Needs
In order for a Buy and Sell Agreement to be effected cash sums are
required for the remaining business owners to purchase the departing
owners share of the business. In addition cash can be provided to
support a departing owner in the event of retirement or disablement.
These funds can be provided by:
(a) cash
(b) mortgage
(c) insurance
The most cost-effective and efficient method of transfer is one which provides certainty that the money required will be available precisely when required.
3. Life Insurance
Life Insurance is the most effective way of providing the cash required at the time it is required. The types of clients that belong to this market are:
- Sole Traders
- Partnerships
- Companies (co-shareholders)
- Key Persons
Unlike personal life insurance selling, business activity usually involves working with other people besides the client. These people may include in particular, the clients Solicitor and Accountant.
4. Key Person
A Key Person insurance needs to be considered where the loss of this person could involve the business in a financial loss from cashflow generation or the increased costs incurred in sourcing a replacement employee.
5. Debt Cover - Personal Guarantees
The owners of a business are generally required to sign twice for
debt borrowed for business purposes usually as
directors/shareholders and then personally. In a lot of instances the
individual's houses are generally taken as security for the loans. It
is important that debt cover be arranged and funded by the business
to release the guarantees and retire the debt and personal liability
in the event of the share purchase buy/sell being triggered.
The arrangement of business insurance involves the skill of all
members of the team - the Solicitor, the Accountant and the
Insurance Agent. It is well to remember that each has his/her own
skills and should not encroach on the others' area of expertise, but
should work together for the benefit of the client.
Contact Us
If you would like to review your buy/sell agreement or wish to obtain a second opinion on your business assurance plan and would like a no cost, no obligation discussion, please contact us on 03 365 4460.