Business Protection


The death of a director who has a significant shareholding in the company can have serious repercussions for all parties.


The surviving Directors.
  • The surviving directors now have a new business partner, the deceased’s successor(s), who may not be familiar with the business.
  • They may also face loss of control if the deceased director owned more than 50% of the company.
  • Their ideal solution would be to buy the deceased director’s shareholding.
The successor(s) of the deceased.
  • The successor(s) may find themselves with a shareholding for which they have no ready market in a company in which they want no involvement.
  • An illiquid asset. If the shares are not sold the next of kin may be left holding a ‘paper asset’ producing little or no income. The position could be even more serious if the shares also give rise to an immediate inheritance tax liability for dependents.
  • The company’s Articles of Association may give the other shareholders the right to block the sale of the shares to an outside party. The next of kin could therefore be forced into a ‘fire sale’ of the shares to the other shareholders at a low price in the absence of any other realistic offer for the shares.
  • They may also be experiencing cash flow difficulties with the loss of the deceased’s salary.
There is very little in life of which we can be absolutely certain, but one fact is guaranteed, we are all going to die… someday.
The one unknown, thankfully, for most of us are that we have no idea when this will be. However, the odds of one partner in a 2 or 3 man business dying or becoming seriously ill before retirement are probably a lot higher than you might think.

Odds of one dying before 65
  • Age 40
    2 partners
    22%
    3 partners
    32%
  • Age 45
    2 partners
    21%
    3 partners
    30%
  • Age 50
    2 partners
    19%
    3 partners
    28%

Odds on one dying or becoming seriously ill before 65
  • Age 40
    2 partners
    42%
    3 partners
    55%
  • Age 45
    2 partners
    39%
    3 partners
    53%
  • Age 50
    2 partners
    36%
    3 partners
    49%

Business Insurance is a means of solving these problems for both the surviving Directors and the deceased’s successor(s).

Business Insurance provides the necessary liquid capital on the death of a shareholder to enable:

  1. The deceased’s sharesto be brought back from his estate or next of kin, and
  2. The surviving shareholders to maintain ownership and control of the business going forward.

How these policies should be structured will depend on the company/partnership itself with consideration also for legal and tax implications of any solutions arrived at.

While the above covers the risk of death of a business partner / director, protection also needs to be considered for serious illness or total permanent disability, which brings its own legal and tax issues.

Most businesses have certain key individuals with specific skill sets, without whom the business’s profits could fall.
The loss through death or critical illness of such a key person could be very financially damaging to the business and should be insured against.


  • Financial effects of death or diagnosis or a serious illness of a Keyperson

    The death or diagnosis of a serious illness of a keyperson of a company could put that company in a financially unstable condition, in a number of ways.

    The purpose of Keyperson Insurance is to indemnify against loss of profits and repay loans on the death of a key individual.
    1. An interruption of business activity and a consequent reduction in profits.
    2. Bank loans on which the deceased gave a personal guarantee may be called in
    3. The keyperson or his/her estate may be owed any loans made by him/her to the company.
    4. Banks and/or suppliers may reduce or withdraw credit facilities over worries about the future profitability of the business.
    5. The company will lose the individual’s expertise and business contacts
    6. The company may have to commit resources to find a suitable replacement. This may be a prolonged process where the individual has unique experience and expertise