Does your business need life insurance cover for its key employees and directors?
Most people arrange life assurance to cover their mortgage and to protect their families in the event of death. However many businesses ever consider whether they should take out life assurance cover on the lives of the key directors and employees. Here is a short case study of the possible implications of being without protection.
The Case for Business Protection
West Midlands Engineering Limited have three directors. David the managing director with a 40% shareholding, Frank the production director and George the sales director, both with 30%. The gross and net profits are £600,000 and £150,000 respectively
Each of the three directors has a specialist role in the company. What would be the consequences of losing any of them?
Let's take Frank as an example:
Will customers find another supplier?
Will competitors approach their customers?
Will the bank call in the overdraft?
Will trade creditors reduce credit terms?
How difficult will it be to find a successor?
The result of anyone of these would put a serious strain on the company's cash flow, so Frank should be insured for his contribution to the gross profit of the business. In addition, the company will need to find a replacement. With recruitment fees, relocation costs and a first year remuneration package, this could easily be £75,000.
Frank has made a £50,000 loan to the company. This is a common way of funding a business; however on death it has to be repaid to his estate, so needs to be covered.
There is a bank loan of £150,000 secured by second charges on the directors' homes. On Frank's death that charge does not die with him – his wife will still be exposed and at risk.
Shares
Frank's shares are worth £225,000. If he dies, his wife will probably want to sell them. The articles of association require her to offer them to the other directors first, at a price to be determined by the accountant. Without cash this cannot go ahead, so Frank needs to be insured for this, to provide funds to his colleagues to buy his shares
Death in Service
We need to ensure Frank's family are looked after if he dies in service. It is normal company practice to insure senior employees' lives for four times remuneration, so Frank needs say £200,000.
Summary
In this small business there are a number of life assurance issues that arise for Frank, which are replicated for the other directors.
Replacement of gross profit
£200,000
Recruitment costs
£75,000
Director's loan
£50,000
Bank loan
£50,000
Share purchase insurance
£225,000
Death in service
£200,000
Recommended sum insured
£800,000
A variety of insurance policies and trusts would be needed to provide this business protection.
IT CAN TAKE JUST ONE BUSINESS SHAREHOLDER OR KEY EMPLOYEE TO FALL ILL OR DIE, FOR AN ENTIRE BUSINESS TO FOLD.
Martin Dodd - Financial Adviser
www.miadvice.co.uk
The Case for Business Protection
An example
West Midlands Engineering Limited have three directors. David the managing director with a 40% shareholding, Frank the production director and George the sales director, both with 30%. The gross and net profits are £600,000 and £150,000 respectively
Death of a Key Person
Each of the three directors has a specialist role in the company. What would be the consequences of losing any of them?
Let's take Frank as an example:
Will customers find another supplier?
Will competitors approach their customers?
Will the bank call in the overdraft?
Will trade creditors reduce credit terms?
How difficult will it be to find a successor?
The result of anyone of these would put a serious strain on the company's cash flow, so Frank should be insured for his contribution to the gross profit of the business. In addition, the company will need to find a replacement. With recruitment fees, relocation costs and a first year remuneration package, this could easily be £75,000.
Director loans
Frank has made a £50,000 loan to the company. This is a common way of funding a business; however on death it has to be repaid to his estate, so needs to be covered.
Bank loan
There is a bank loan of £150,000 secured by second charges on the directors' homes. On Frank's death that charge does not die with him – his wife will still be exposed and at risk.
Shares
Frank's shares are worth £225,000. If he dies, his wife will probably want to sell them. The articles of association require her to offer them to the other directors first, at a price to be determined by the accountant. Without cash this cannot go ahead, so Frank needs to be insured for this, to provide funds to his colleagues to buy his shares
Death in Service
We need to ensure Frank's family are looked after if he dies in service. It is normal company practice to insure senior employees' lives for four times remuneration, so Frank needs say £200,000.
Summary
In this small business there are a number of life assurance issues that arise for Frank, which are replicated for the other directors.
Replacement of gross profit
£200,000
Recruitment costs
£75,000
Director's loan
£50,000
Bank loan
£50,000
Share purchase insurance
£225,000
Death in service
£200,000
Recommended sum insured
£800,000
A variety of insurance policies and trusts would be needed to provide this business protection.
IT CAN TAKE JUST ONE BUSINESS SHAREHOLDER OR KEY EMPLOYEE TO FALL ILL OR DIE, FOR AN ENTIRE BUSINESS TO FOLD.
Martin Dodd - Financial Adviser
www.miadvice.co.uk