Risk Management:

Business Protection

For business owners and senior employees failure to adequately protect the business against unforeseen events can have a devastating effect on the business and its shareholders. Shareholder/partnership protection and key person insurance are the two main types of insurances that most business owners or shareholders need to consider to protect their livelihoods.

Shareholder Protection

Both shareholder and partnership protection have the same essential function – to allow the remaining directors or partners of a business to purchase the deceased partner’s share of the business from the next of kin with the proceeds of the insurance policy that was established on the partners/directors behalf.

The main advantages for having such protection in place are as follows:

• The partners agree that on the death of one, the surviving partners have the right to buy out the deceased partner’s share from the next of kin. Life cover is put in place so that the funds needed to buy the shares will be available. It is also possible for the company to buy back the shares of a critically ill partner or shareholder.
• All partners know their families will be looked after in the event of their death and that the next of kin of the deceased receives a fair price for their business holding.
• It ensures that the remaining business partner/s retain ownership and control of the business without interference from a third party.
• It avoids the need for personal loans to be taken out or the need to withdraw significant funds from the company to buy the deceased partners/shareholders share.
• It provides a formal plan of what should happen on death of a shareholder/partner which provides clarity for all concerned and avoids any potentially expensive legal proceedings down the line.

As an example, if the value of a business is €3 million and there are three partners, each partner would be insured for €1 million. In the event of the death of a partner the insurance policy becomes available to the entity to pay the value of the deceased share of the business to the deceased’s estate. Therefore, the business does not need to get a loan or sell assets to fund the €1 million cost of the shareholding and the decreased next of kin receives a fair price for the business shareholding.

Key person Cover

Key person insurance is designed to protect the business (and ultimately its shareholders) against any potential losses in the event of the death of a key person within that business. The level of cover is typically based on the value that the key person has in the context of their expertise, knowledge, experience and their contacts. The level of life cover may also be calculated based on a multiple of the profits that the employee creates for the business. The policy is generally established in the name of the business whereby the beneficiary of the life policy is the business. It is not established for the benefit of the individual’s estate but for the benefit of the business.