There’s no doubt about it, the idea of losing a key person in your business to illness or death isn’t something any of us want to fathom. However, establishing a key person life insurance policy, with critical illness, written on a single life basis, held in trust for a surviving business partner could be the difference between a failing thriving business in the event of a death.
You may remember the phrase “Stop, Look, Listen”. It’s aim: to keep children safe by encouraging them to think about their actions before rushing into them. How might this same phrase be applied to modern day professionals?
Reflect on the following scenario – more common than you might otherwise think:
Bob and Jenny are old University friends who established a thriving business partnership. Bob is brilliant at managing cash flow and the backroom staff. Jenny is the face of the company. Through Jenny’s connections and networking skills, the partnership was going from strength to strength. To cope with demand, they decided to take out a business loan to fund the purchase of new equipment to improve business efficiency. Profits generated from the business allowed them to live comfortably meeting day to day expenses, personal commitments and holiday abroad. How many businesses owners might this resonate with?
And then, out of the blue, Jenny passed away. Her personal affairs are organised. She made a Will a few years ago and all assets passed to her surviving partner. Her personal life assurance is in trust and pays off outstanding mortgage debt. Her husband and the children are well catered for given these terrible circumstances.
Meanwhile, Bob is experiencing problems – and they’re mounting. Jenny knew everyone and secured all of the business through her own connections and by networking. After Jenny’s death, Bob is attempting to deal with these contacts while juggling trying to maintain relationships to keep new business coming in. However, it is proving tough and is not within his current skillset. At the same time, he is attempting to continue to manage the business and service the debts, however, the small amount of cash in the business is dwindling fast to meet outstanding expenditure and orders are drying up. Bob is beginning to lose control and the business is suffering. He has also had to use some of his personal money to help with these debts and does not think he can find or afford to pay a replacement for Jenny. Bob is working 24/7, he’s under pressure and his family are bearing the brunt.
Believe it or not, this is not an uncommon scenario should a business suffer the loss of a key person. Fifty-two per cent of businesses would cease trading in under a year in the event of a business losing a key person, according to State of Nation SME’s report, sixth edition – Legal & General 2019.
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If Bob and Jenny had considered the “What if one of us dies or becomes seriously ill?” question they might have stopped, looked at their situation and listened. There’s no denying this is a dreadful situation I’ve recounted. However, from Bob’s perspective, life may have been a little easier if he and Jenny had considered establishing a key person life insurance policy, with critical illness, written on a single life basis, held in trust for the surviving business partner. In a world where cash is king, a lump sum has the potential to protect the business and its employees from failing. The money could be used to repay debt, cover recruitment costs and ultimately could have given Bob time to concentrate on how to move the business forward.
Aside from the peace of mind a Key Person Life Insurance policy would have offered Bob, there are also tax efficiencies to such a policy whilst in force. As the business pays the premiums of the policy it effectively owns it and is the beneficiary of any claim. The premiums are tax deductible if certain conditions are met. Its purpose is to replace a loss of income resulting from the key person being unable to work, caused by illness or death, and it must be an established term assurance whilst the person is employed by the employer.
You only have to Google Key person cover to find 130 million results, and spending time to ascertain which one’s right for you is using time you probably haven’t got. Making use of personalised services available from a financial planner will ensure your policy and trust documents are set up appropriately for your needs.
If this article has resonated with you at all, please don’t just turn over the page. Stop, Look, Listen – and act. Why not call a specialist and have a short chat? It might just mean the difference between the protection of your business, or it could fail.
The content contained herein is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or any other advice.
Written by Andrew Mence FPFS, Independent Financial Adviser/Chartered Financial Planner, Integrity365
Customer service is at the heart of everything Integrity365 do, from the early days of pensions and ISAs to investments and lump sum decisions, through to retirement and later life planning, they are here to support you through the key stages of your life with a holistic approach to financial planning.