Just as Personal Life Insurance is purchased to shield a family from the financial loss incurred by the death of the main income earner, so business assurance is acquired to protect a business enterprise from the financial loss brought about by the death of a principal or some other key person.

In many instances owners of the business, whether direct, as shareholders or trustees, carry all their eggs in one basket as their business holdings and their personal assets are tied together, if not identical. A business failure precipitated by death would be just as disastrous to their personal estate as to the business.

Personal life insurance has always been sold on the premise that a parent is a key person in the family unit and that his or her death would invite financial disaster. Business insurance is based on the fact that the owner/managers or small number of employees are key people within the business enterprise and that the death of any one of them could weaken, and might wreck the business.

Briefly the principles of Business Insurance are as follows:-

1. To provide cash for the purchase of the shareholding or interest a deceased associate has in the business enterprise and prevent it from falling into outside hands.
2. To decrease the financial loss to a business in the case of death of a valued employee or owner whose business ability, technical knowledge or financial resources are necessary to the prosperity of the business.
3. To provide retirement funding for the business owner or key employee.
4. To retire debt secured by mortgage over business assets and by personal guarantee.

In the conservation of businesses, business people are usually well aware of the need to arrange many forms of insurance e.g. fire, burglary, public liability, motor vehicle insurance and so on but none of these defend against the loss or destruction caused by permanent removal of the most valuable resource of all, people, upon whom the whole fabric of business rests.

Many business people do not fully appreciate the serious problems that can arise following a death or disablement of an owner or valuable employee and so do not recognise the need for business life insurance.

The solution to Business Insurance needs to comprise three main components:

1. A Buy/Sell Agreement
   This agreement establishes the basis upon which an owners share in a business will be treated upon an owner/shareholder departing the business. The agreement is a contract where each business owner agrees to sell their share of the business upon death, retirement or disablement for a predetermined price (or agreed valuation method). The fundamental benefit of the buy and sell agreement is that it provides a certain future for the family of the departing owner and for the remaining business owner in the event of death, retirement or disablement of a partner.
2. Financing for the Buy/Sell Agreement and Other Needs
   In order for a Buy and Sell Agreement to be effected cash sums are required for the remaining business owners to purchase the departing owners share of the business. In addition cash can be provided to support a departing owner in the event of retirement or disablement. These funds would be provided by:
   1. cash flow
   2. loans
   3. insurance

Life, Income Protection and Medical Insurance is the most effective way of providing the cash required at the time it is required. Unlike personal life insurance, working out the appropriate level of business insurance usually involves working with other people besides the client including the business owners, Solicitor and Accountant.

One type of business insurance is Key Person cover which needs to be considered where the loss of this person could involve the business in a financial loss from cashflow generation or the increased costs incurred in sourcing a replacement employee.

As the homes of owners in a business are generally taken as security for the loans, it is important that debt cover be arranged and funded by the business to release any personal guarantees and retire the debt in the event of the share purchase buy/sell being triggered.

Contact Us

If you would like to review your buy/sell agreement or wish to obtain a second opinion on your business assurance plan and would like a no cost, no obligation discussion, contact us on +64 21 662 472.