What role does life insurance play in a business?

6 August 2020

I can’t afford to buy my business partner out if they die. Sound familiar?

Quite naturally when we do business planning and growth strategies, humans focus on the upside, the positives. We usually plan for the horizon and how we’ll take our business to the next level.

Equally, many businesses with multiple working shareholders, are also very good at assigning roles and responsibilities with the key items that ensure the business progresses to the next stage.

When things are going well, it’s easy to get carried away. Your business seems wonderful. You’re not only employing people and ensuring security and a future for your staff but you’re also enjoying the financial rewards along the way; a fantastic lifestyle and accumulation of personal assets such as homes, boats and holidays. All rewards for the risks taken.

But behind every business is a human being, and in life there are two things we can be certain of - death and taxes. While I will leave the taxes for the Accountants to deal with, what happens if the music stops for one of your business partners? Could you and/or your other partners afford to buy them out?

While many business owners appropriately focus on the growth side of their business, paying attention to the succession side is equally important, especially as the business grows and hits key milestones.

Without an appropriate plan in place, you could find the deceased’s spouse or estate paying very close attention to the business and in turn, their inheritance. They could potentially even end up taking the vacated seat at the boardroom table.

Banks, lenders and key stakeholders might have concerns with the business’ ability to continue to deliver and thrive without the input of the deceased. Or, they may be worried about any potential disruptions the spouse or estate could cause.

To help avoid situations like these, business owners could consider a Buy Sell Agreement. In the event of the death, illness or incapacity of a shareholder, a Buy Sell Agreement can be drafted in advance and held until/if required. A Buy Sell Agreement can include instructions on how you and/or your shareholders want the business to be transitioned.

Funding an unplanned exit through a Buy Sell Agreement is simply using a life insurance contract to solve a real business problem, and can provide certainty and continuity for the business, staff, shareholders and estate. And by addressing the situation in advance when you are in the “good times”, you hold a position of control, meaning as the shareholder(s) you can deal with these scenarios through a formal process, in a rational setting, and not while you’re under enormous stress.

Depending on your circumstances, life insurance, along with other appropriate personal insurance products such as Total and Permeant Disability (TPD) and Trauma Insurance can also play a key role in providing cost efficient funding should an unplanned exit from the business occur.

For more information or assistance planning for succession for your business, please speak with your financial adviser or get in touch with our dedicated Risk Insurance team.