There is a 32% chance of a keyperson in your business passing away before the age of 65*

As sobering as our headline is, it is an important statistic to recognise and prepare for. Our previous insights article Protect your business from the financial consequences of the loss of a keyperson outlined some of the main considerations of key persons cover for businesses and the protection this type of cover can provide in the unfortunate event of the sudden death of a key person. In this insight, we shift our focus to consider the ownership and business continuity issues which may result from the sudden loss of a director. A strong board of directors helps shape and strategically drives businesses forward. The loss of a key contributor can have a significant negative impact on the financial standing of a business.

The sudden loss of a director generally would result in their proportion of the business being passed to their next of kin. This can create additional stress and pressure for both the family of the deceased and the remaining directors in an already upsetting period. Inconsistency can also present an additional strain to business stability.

What is Co-Director Insurance?

This is a life insurance policy for the business, providing compensation to the shareholders of a company for the loss of a director. The business owners enter a buy back agreement stating:

• Policy proceeds are to be used to purchase the share of the decreased from his / her next of kin (usually spouse)
• Next of kin is obliged to sell the shares they have inherited back to the remaining business owners

Simply, if one of the directors dies, a lump sum is provided to the business, enabling the remaining directors to effectively buy the decreased person’s shares from their next of kin.

What are the benefits?

In addition to relieving some of the additional stress during an emotive period, co-director insurance has many practical benefits:

• The surviving directors remain the sole owners of the business. There is no threat of new owner entrants. For example, in the absence of a formalised agreement, the next of kin may choose to sell inherited shares to a competitor.
• A clear, practical solution is available for the next of kin who may not have the required skills, expertise or desire to become a director of the business
• Surviving directors do not need to raise the capital required to buy back shares from the deceased’s next of kin.
• Cash is immediately available to the business to pay the next of kin of the deceased the market value of their share of the business.

Without adequate protection in place, many businesses can find themselves in a very challenging financial situation with remaining directors using personal capital or seeking a loan to buy back shares from the next of kin of the deceased.

In some instances, disagreements between the remaining directors and next of kin can require legal remediation.

Protecting your key people

In summary, businesses protect their property and cars etc. It is important that they also insure their key people. The financial implications of a loss of a key person can be insured. Share buyback arrangements not only provide financial reassurance, they also create a transparent ownership process, bringing certainty and business stability.

To discuss providing cover for your business, please contact your WTW Consultant or reach out to our Financial Planning Team directly.

Footnote

^*Based on a business comprising of 3 key persons under the age of 40 – mortality tables (AM92) published by the Institute of Actuaries (UK) April 2000.