Insuring staff covers risk of death to your business

July 9, 2008

Insuring staff covers risk of death to your business

Bryan Hirsch

THE term � business assurance� conjures up a multitude of needs that most businesses often fail to realise.

When setting up a business, one considers the financial risks that you and your family may face and what measures one can take to negate those risks. One always thinks of how the business should be structured, but so often one overlooks the risks relating to key people in the business.

This does not only relate to new businesses, but with the shortage of good and skilled management in SA it relates to small and large successful businesses alike. Business assurance ensures continuity of the business and in the case of an unfortunate incident, can and will cover financial shortcomings. A large portion of an individual�s assets include the value of the business. I have seen cases where the value of the business on the proprietor�s death is a lot less than when the owner was alive.

It always amazes me how much time companies spend reviewing plant and machinery and all other types of risk cover, and yet forget to insure their primary assets � their key personnel. I believe that the onus is also on the key people themselves to discuss the importance of insurance, as they will know if they are key to the business .

There are many ways to provide for business continuity. There are differences between insuring to buy shareholders out and replacing a key person.

When it comes to the sale of shares then a buy and sell arrangement is essential. This is an agreement between shareholders or partners whereby they agree to purchase the shares or interest in the business in the event of death or permanent disability. This payment could be funded by life assurance. It ensures a fair price for the business interest on the one hand, and on the other hand enables the surviving parties to increase their ownership of the business . Without an arrangement like this , one could end up being in business with spouses or children who are now stakeholders. Surely this is the last thing the partners would want.

When it comes to replacing skills lost because of death, life insurance for that person will help in finding a replacement . The cover should also include the financial costs involved in sourcing and hiring the replacement .

If a business has an overdraft, business assurance is a useful mechanism to cover this debt in the event of death.

Business assurance and personal insurance are not fundamentally different. However, with business assurance one has the choice of conforming or nonconforming policies. Under a conforming policy the premiums are tax deductible but proceeds will in most instances attract tax, whereas under a non conforming policy, although the premiums are not tax deductible, the proceeds are received free of tax.

With personal insurance the premiums are not tax deductible but the benefit is tax free.

I have come across many instances where the owner of a business has died , and the proper planning and business assurance has not been put in place. This results in stress and difficulties for the families that have always relied on the deceased�s income from the business.

As I said at the beginning of the article, it�s not only small businesses that need cover. I have seen large companies suffer and slump because they failed to recognise a particular individual in the company who had special, irreplaceable skills.

I urge business owners and shareholders to take the necessary action to ensure that they (and their heirs) do not find themselves in a less-than-favourable situation due to incomplete financial planning. It certainly does not need to turn out like that.

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