Business Owner and Shareholder Protection Strategies

I’ve recently noticed a significant increase in asset protection questions from business owners.

In every office, shop or factory in the country there is a notice proclaiming that the employer has taken out insurance to cover accidents to employees at work. Every car or lorry owned by a business must have at least the minimum level of insurance required by law. Most prudent business people will have arranged for insurance on the factory, office buildings, even on the desk at which they work.

But one valuable business asset is often left uninsured. We maintain that too few businesses have any insurance to cover the one eventuality that can literally mean the end of the business and the income it provides – the death or illness (including critical illness) of a key person.

Whether the business in question is a partnership, a Limited Liability Partnership, a company, or even a sole trader, it is likely to have an individual, or individuals, crucial to its continued activities and prosperity.

According to a survey by Royal London Assurance “People will put other forms of financial protection in place for their business such as insuring their premises, machinery or even its debt. However, they don’t always protect what is the greatest asset any business has, namely the people who work in it. Given the 24% likelihood of one person in a two-person firm dying before the age of 65 and the negative business and commercial implications this can have; it is worrying that businesses are overlooking this financial risk.”

There is a superb range of business protection solutions available to help businesses survive the death or indeed the serious illness of someone that would result in a financial loss for a business. These solutions provide a number of benefits for businesses:

  • They offer real peace of mind benefits to the directors or partners, as they remove the financial worries associated with the death or serious illness of a colleague;
  • They remove the need for businesses or surviving partners to borrow money to buy out their partner’s share of the business;
  • They remove the need for a surviving family member to take the deceased’s place in the business.

There are a number of different types of business protection solutions available to suit the different types of business structures; I have noted 3 of the main solutions below:

  • Co-director’s insurance – This is where each director insures themselves against the death of their partner, enabling them to buy out the partner’s shares on death and/or serious illness. As an alternative, the insurance can be effected by the company itself.
  • Partnership insurance – Similar to the above, a partnership takes out insurance, protecting itself against the death or serious illness of an individual partner, enabling them to compensate the deceased partner’s estate for their share of the partnership.
  • Key person insurance – This helps a business to minimise the impact of the death or serious illness of a key employee. The insurance can be used to quickly attract a replacement employee or indeed to pay off loans of the company that may have been guaranteed by the deceased.

So, in conclusion, few business owners – whether shareholding directors, partners or sole traders – like to think of the problems that their untimely death or long-term incapacity could cause. The key to finding the right solution is getting the right advice. If protecting the future of your business and family is a concern to you, always seek independent financial advice before committing to any long-term plans.

Gerard O’Brien LL.B LL.M CFP® QFA is a Certified Financial Planner and the Owner of Heritage Wealth Management, a Financial Planning practice based at 27 Cook Street, Cork. For more information, contact Gerard at gerard@heritagewealth.ie www.heritagewealth.ie

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