Can Your Business Afford to Lose a Key Person?

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In the world of business, the key to success lies in something vital—people. 

Whether large or small, businesses rely heavily on their most important asset: the individuals who make things happen. People drive the growth and prosperity of a company. 

In this blog, we delve into the impact of losing a key person and explore insurance solutions that can fortify your business against such unforeseen challenges.

Understand the value of the key person to the business

Understanding the value of a key person within a business is paramount to grasping the potential repercussions of their absence. 

The essential leaders and key employees of a thriving company contribute valuable elements, such as:

  • Leadership 
  • Specialised or technical skills
  • Expertise in a particular area of your company
  • A unique talent
  • Network of contacts
  • Ownership in the organisation
  • Influence on decision-making

Key players in small or family-run businesses may also be essential to the brand and have built invaluable relationships with local customers.

The Impact of Losing a Key Person

Imagine a successful company with a dynamic CEO driving growth and maintaining critical client and partner relationships. 

Now, picture the repercussions if that CEO is suddenly no longer available due to an unexpected passing or severe illness. The fallout could include:

Financial Losses

The immediate drop in revenue and profitability as stakeholders lose confidence in the company’s ability to thrive without the key person’s leadership.

Debt Payment Challenges

Difficulties in meeting existing debt payments, including loans, due to reduced cash flow and financial uncertainty.

Director’s Shares

Complex challenges in transitioning ownership, especially concerning director’s shares.

Purchasing the deceased’s shares might be the best course of action. However, where are the directors going to find funds on hand to carry out this?

Bereaved Deceased’s Successor Forced into Business Leadership

The deceased’s successor, who may not be familiar with the business, is compelled to step into the business and significant shareholding. 

Lacking a shared vision for the business’s future and lacking industry experience, this situation brings hardship and stress to both the successor and surviving business owners.

Surviving Partner Seeking a Business Loan

The death of a co-owner prompts the surviving partner to secure a substantial business loan to buy out the deceased partner’s family. 

This sudden financial strain, coupled with the loss of a key contributor to the business, forces the surviving partner to consider selling the once-successful business.

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Why does your business need business protection insurance?

You should ask yourself these questions:

  • What would happen to your business partner’s shares in the event of their death?
  • Would your business survive if you or one of your key employees became seriously ill?
  • How would you feel if a shareholder passed away and their family members gained partial control of your company?
  • Is your family financially secure in the event of your own passing?

If any of these questions weigh on your mind, it may be prudent to explore business protection

Business protection is like life insurance and serious illness for your business, serving to shield the business owners, shareholders, and key employees—and fortify business continuity.

Protection in Case of Key Person or Director’s Death 

Business protection specifically addresses the impact of the death of a key person or director, offering financial protection to the business by providing necessary funds to mitigate the loss and navigate the challenges associated with the absence of a critical team member. 

It can also provide funds for surviving business partners to buy out the shares of a deceased partner, preventing disruptions to the business.

This ensures that the business can manage the financial consequences and continue operations smoothly in the wake of such a critical event.

Protection in Case of a Key Person or Director’s Become Seriously Ill

The advantage of including serious illness cover in the arrangement is that the policy will pay out a pre-determined lump sum in the event that a director contracts a specified illness.

This means that the other directors will be able to obtain the necessary capital to purchase their ill colleague’s share in the business.

Insurance Planning

Explore insurance planning as a strategic approach to address and mitigate potential risks. Businesses can enhance their overall risk management strategy by seamlessly incorporating insurance planning into their operations.

Here are some keyman insurance solutions to consider:

Key Person Insurance

Keyperson Insurance refers to life insurance and/or specified illness cover taken out by an employer for a key director or employee

This insurance is a safeguard for the employer against the financial implications stemming from the key person’s death or illness. 

Implementing Key Person Insurance ensures that the business receives a lump sum payment, acting as a financial safety net to reduce potential profit losses associated with the passing or diagnosis of a specified illness in a key director or employee. 

Benefits of the Key Person Insurance

With Keyperson Assurance in place, the company will receive an immediate predetermined lump sum payment upon the death or diagnosis of a specified illness of the individual covered by the policy. 

Your business is free to use these funds according to its discretion, such as:

  • Pay off outstanding bank loans
  • Repay any loans made by the individual to the company
  • Recruit a suitable successor
  • Invest the funds in the business

Co-Director Insurance

A Co-Director Insurance is business-specific life insurance that can provide compensation to shareholders of a company

The death of a co-director can be a serious threat to the prosperity of a business, leading to substantial challenges for both the surviving directors and the estate of the deceased. 

The primary objective of Co-Director Insurance is to guarantee that the surviving directors receive the essential funds required to acquire the shareholding of the deceased director in the business. 

A Co-Director Insurance plan is often set up by the company’s directors, who agree that in the event of one of them passing away, the remaining directors will purchase that person’s shares in the company.

Benefits of the Co-Director Insurance

The advantages of this are: 

  • The business remains under the supervision of the remaining directors.
  • The remaining directors don’t need to rely heavily on loans.
  • The surviving directors don’t need to put pressure on their own financial resources.
  • The estate of the deceased will receive sufficient compensation for selling their inherited share of the business.

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Corporate Co-Director Insurance

Corporate Co-Director Insurance is a business-specific life insurance that can provide compensation to a company if one of the directors of the company dies. 

If this unfortunate event occurs, a lump sum will be released, allowing the deceased person’s shares to be bought from their estate, in the company’s name.

Benefits of the Corporate Co-Director Insurance

The advantages of this are: 

  • The company can keep managing its business by purchasing the shares of the director who passed away.
  • The business have security of knowing they will not be obliged to relinquish a majority shareholding.
  • The estate of the deceased will receive sufficient compensation for selling their inherited share of the business.
  • The deceased’s successor is not obliged to become involved in the business.

Partnership Insurance

In a partnership, where two or more individuals collaborate in running a business, mutual support and advice form a vital foundation. 

These partners often represent the most valuable assets of their business. However, the unexpected death of one partner could lead to significant challenges, potentially causing serious issues related to the deceased partner’s share in the business.

The primary objective of Partnership Insurance is to secure essential funds for surviving partners to acquire the share of a deceased partner in the business. 

In this arrangement, the surviving partners purchase the shareholding of their deceased colleague from their estate at its market value.

Benefits of the Partnership Insurance

The main benefits of this insurance are:

  • Provides the money for surviving partners to pay back the estate of the deceased.
  • Partners have the security of knowing they can retain control of their business.
  • The deceased’s estate will receive compensation for giving up their inherited share of the company. 

Additional Insurance Solutions 

Beyond key person insurance, there are other valuable options to consider:

Pension Term Assurance

Pension Term Assurance is a life insurance policy designed to provide a lump sum payout in the event of the policyholder’s death during the term. 

This unique policy structure leverages available tax relief under pension legislation, and you don’t need an existing pension plan to take advantage of it. 

Eligibility includes being self-employed or working in non-pensionable employment.

One of the main features of Pension Assurance is the ability to claim full tax relief at your marginal tax rate on premiums, potentially making this valuable protection up to 40% more cost-effective than a standard Term Assurance policy.

Executive Income Protection

Executive Income Protection policy is another valuable insurance option for business owners. It is purchased on behalf of employees by the employer or business. 

The company is responsible for paying the premiums, which are deductible from corporation tax as legitimate business expenses. As a result, it may be a very effective strategy to safeguard your revenue and the income of your valued employees.

Executive Income Protection not only provides a contingency for your company in times of need but also guarantees the continuity of your pension contributions in case of illness or injury that prevents you and/or your employees from working.

It provides the company with an income to pay you or your key employees up to 75% of earnings (less any social welfare payments) when either of you are off work due to illness or injury, up to a maximum of €262,500.

Executive Income Protection allows you to:

  • Safeguard your income during your working years
  • Ensure the protection of your pension contributions
  • Benefit from tax efficiency

Get a Quote with True Wealth

Effective planning is crucial for the success of your business, given the inherent risks and the potential for unforeseen events. The key lies in being well-prepared. 

At True Wealth, our team of financial advisors specialises in retirement and pension planning tailored specifically for business owners, as well as comprehensive business protection strategies

We are also experts in savings and investments, pension tracing, personal and business financial planning, mortgages, and wealth extraction.

You can also know more about the benefits of adopting a comprehensive financial strategy for your business by reading our article. From risk management to future growth, this article sheds light on why a holistic approach is essential for businesses to navigate challenges, seize opportunities, and build a solid foundation for long-term prosperity.

Consult with our experts at True Wealth to proactively plan for the challenges and opportunities that lie ahead for your business.

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All our content has been written or overseen by a qualified financial advisor. However, you should always seek individual financial advice for your unique circumstances.

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