A business may not have debts or key people, however all businesses should have a plan in place detailing what would happen on the death, disability, permanent total disability, or critical illness of an owner.
Business succession planning protects: the shareholders and partners, their families, their employees and the business.
There are three main options to transfer shares at the point of death:
1. Automatic accrual
The is when then the shares of the shareholder are automatically redistributed to the remaining shareholders. Obviously the family will be compensated so a life policy is set up for the benefit of the family.
2. Double option agreement
This is where either party has various options, usually with a time frame around the option. So the agreement could state the company has the right to buy the shares and require the sale, within 60 days of death. Alternatively, it could be the family that has the right to require the company to buy the shares, or even a mixture of both.
3. Buy back agreement
This is is similar to a double option agreement, however a buy back solution states that the shares will be bought and the family must sell them. Again a life insurance policy should be in place to compensate the family.
Each person should be covered to the value of their shareholding. Most companies take out a cover for a term of 5 years and of course share values can go up and down. It may be worth seeking professional advice on the value of the company before valuing the shares. We also generally advise clients to think about what they would want their family to receive for the value of their shares.
Key Person Insurance
The key people within a business may not always be the managing director. A key person can be defined as ‘anyone whose loss, either permanent or temporary, would affect the business’s ability to maintain turnover or generate profits’.
Losing one of your key directors or employees can be seriously detrimental to the business. Key person insurance (profit protection) is simply life insurance on the key person in a business; ensuring stability and continuity of the business.
Key Person Protection is designed to pay out a lump sum on the death of the insured key person, during the length of the policy. It is paid as a lump sum and could significantly help the business to recover. The proceeds can be used to help replace lost profit or finding and hiring a replacement.
Setting up key person insurance is simple. Start by identifying the key people by assessing their talents, skills, relationship, etc and then value their contribution. Recognising the cost of replacing the key person and the loss in revenue due to loss of the key person are both very important.
The cost of key man insurance is based on the life that is being insured. It's calculated much like normal life insurance depending on how old the person is if they smoke, the amount of cover and the term. All quotes are subject to underwriting which means premiums could go up before terms are issued.
Relevant Life Insurance is set up to allow employers to offer tax efficient life to their employees. The policy is owned by the company and paid for by the company. There are fantastic cost savings of using relevant life due to its tax efficiency. The company is able to set up life & critical illness insurance for its employee's at a much cheaper rate than the life assured can set up a personal policy. Premiums are paid by the company and are tax deductible.
For directors this can mean a 20% saving on corporation tax and then depending on your tax bracket and extra huge saving by not having to pay premium using your already taxed income.
Relevant Life is set up with a trust where individual people, usually a partner, child or family member can be paid from any claim. A tax-free, lump sum on the death (or diagnosis of a terminal illness) of the person insured will be paid out by the company. The proceeds go directly to the employee's family or financial dependants
Like a traditional death in service policy, the sum assured with a relevant life policy is also based on a multiple of remuneration. For a company director the definition of remuneration is based on salary plus dividends plus bonuses etc. The multiples vary from provider to provider and depend on the age of the director being insured. These range from 10 times remuneration to 25 times remuneration.