Losing Your Most Valuable Asset - In Business Spring 2003

01 April 2003

Despite insuring their premises, company cars and fixtures and fittings without question, many businesses fail to insure their most valuable asset; their people. By failing to do so, these businesses are often putting themselves in financial jeopardy.

It is human nature to ignore these risks and assume that untimely death will not affect your Company or Partnership. The statistics show businesses should be concerned, especially where there is a predominantly male management team. One in five men currently aged 40 will die before the age of 65.

Businesses should be considering the implications to their finances of the following events:

• Death of a key member of staff. Will the loss of that person adversely affect their profits?
• Death of a Director/Partner who has lent the business money. The estate of the deceased would normally require this loan paid back immediately. This could be unplanned for by the Company/Partnership, or it may simply not have the cash.
• Death of a shareholding Director/Partner. How does the business ensure that the deceased's shares remain under the control of the surviving Directors/ Partners, yet still provide for the deceased's spouse and children?

Companies and Partnerships need to ask themselves: “Would I like my next Business Partner to be the deceased's widow or widower, new husband or wife?” The firm should consider putting in place an agreement, commonly known as a ‘double option agreement'.

A double option agreement provides:

The option for the directors/partners to purchase the business interests from the personal representatives of the deceased business associate within a fixed period.

And:

The personal representatives of the deceased the option to sell the business interest to the surviving Directors/Partners also within a fixed period.

Life cover is the most cost-effective way of solving these problems and makes sure the money is available when it is needed most. It is important that the policies are set up correctly as inappropriate advice could lead to adverse tax implications after a claim. It should also be noted that premiums can vary enormously between insurers and independent advice should be taken. The cost to a business for insuring an 40 year old non-smoking male for £500,000 for 5 years is only about £40 per month.

For more information please contact Simon Ludden, Financial Planning Manager.

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