30 September 2020
Last week, my colleague Steve Alexander wrote a fantastic article on why Shareholder Agreements are a must have for businesses. It’s a great read for all shareholders and directors in a business and to me, was a critical example of how changing our thinking from ‘purchasing life insurance’ to ‘funding a solution for a real business problem’ could go a long way in helping address why a business owner should hold life insurance cover.
In his article, Steve wrote, ”Buy/Sell Agreements can help business owners avoid the situation where an exiting shareholder or the family of an exiting shareholder are unable to sell their shares because the other party cannot afford to pay for them. In this situation, the family would have little appetite to have a financial interest in a company they have no day-to-day input into. Likewise, the remaining shareholders would have little appetite to be in business with the ex-shareholder or their family.
“For this reason, it is prudent to have insurances in place to provide funding where remaining shareholders do not have the financial means to buy out the shares.”
As professional life insurance advisers, we often see business owners with Shareholder and Buy/Sell Agreements that specify the purchase of life insurance policies to fund an unplanned exit of a shareholder in the event of disability or premature death. However, far too often, the purchasing of the life insurance policy has not been facilitated.
Without a life insurance policy in place, the funding mechanism that would have ensured a smooth transition should the agreement need to be called upon, is not there. Subsequently, each party could be placed in a position where they may be unable to easily facilitate the transaction, which could result in financial distress or a less than ideal business partnership. All of which, could have been avoided.
A lack of understanding around the type of insurance cover required, the importance of insurance cover, the outcome it can help achieve, and professional management of the underwriting and application process seem to be the most common reasons why business owners overlook life insurance.
Engaging a life insurance adviser that specialises in business can help you achieve the outcomes you set out to achieve. Working hand in hand with your other business advisers, they can provide support to set up your funding strategy and ensure the documentation and underlying strategies are reviewed as your business and personal needs evolve, grow and change.
If you’d like to discuss how a specialist Risk Adviser can support your business, speak to your adviser or get in contact with the Findex Risk Insurance team.