There are numerous unwanted situations that could arise from the loss of an important or key member of staff through death or long term sickness.
Business protection in the form of life insurance or sickness cover can be used to help deal with problems that may arise.
If a key member of staff were to die, it could cause serious problems if that person was involved in a major project, knowledgeable about fundamental business practices or the main point of contact for an important client.
The amount of cover required will vary from one company to the next and depend on the impact the likely loss would have on the company.
The time it will take for a company to recover as well as the cost involved in finding and training a replacement.
Once a figure has been established a life insurance policy can be taken out on the employee.
If a partner dies, the spouse or family of the deceased may wish to withdraw the value of the persons share in the business. This can cause problems because much of the value of the deceased share could be tied up in assets such as important machinery or computers. To overcome this problem, partners need to consider life insurance policies against each other.
There are three ways to protect against this:
Automatic Accrual – an agreement between partners divides the deceased’s share between the remaining partners and the family of the deceased are compensated from the proceeds of a life insurance policy (written in trust for tax purposes).
Buy and Sell – this method simply means the legal representatives of the deceased are obliged to sell the share to the remaining partners who are in turn obliged to buy it. The remaining partners are able to buy the share from the proceeds of a life insurance policy taken out by the deceased on their own life and placed in trust for the remaining partners. Cross Option – similar to Buy and Sell except the deceased’s estate is obliged to sell the share and the partners have the option of buying it.
If a shareholder of a small firm dies the firm is likely to want to be able to buy the shares back. By taking out a life insurance policy on the life of the shareholder for a comparable value of the shares the company will at least have the ability to buy the shares given the option.
If a key member of staff is prevented from working due to sickness a company can suffer serious consequences.
Policies are available which can provide a regular monthly income to a business if a ‘key person’ is unable to work. These are basically income protection policies taken out by a company on an employee with the benefit being paid to the company.
If a company is also paying sickness benefits to a member of staff, additional income will help pay for a temporary replacement and reduce the affect of the dual costs incurred.
In much the same way as protecting against the loss of an employee due to sickness a partner is likely to be a financial drain on a partnership if they are unable to work due to sickness.
Key Person cover can be used to provide an income to the partnership.
Even though self employed people often employ other people they are likely to do all of the important work themselves. If this is the case their income will stop very quickly if they are unable to work due to sickness or serious accident.