Business Risk Planning

Life Insurance

Business Continuation Insurance

Business continuation insurance is insurance structured to protect against the financial effect of the death or disability of a partner and to support business succession planning. Usually comprising life and disability insurance policies, the policies depend on the terms of ownership transfer, which may take the form of a buy-sell, cross purchase, or entity purchase plan. Essentially business continuation insurance is a risk management strategy that enables the rest of the company to move forward despite the loss of a key person. It helps reduce the effect of the stress resulting from the financial losses and sudden lack of leadership and implements a clear agreement to ensure business succession and prevent future power struggles, misunderstandings, or conflicts.

Buy-Sell Agreement

A buy-sell agreement is an arrangement that allows the division of business shares or interest among partners or shareholders in the event that one of the co-owners or shareholders retires, becomes disabled, passes away, or wishes to sell. In the context of insurance, life insurance is often purchased to provide the funds needed to buy the shares that become available.

Buy-sell agreements are generally structured as a cross-purchase or stock redemption plan and serve two main functions. First, it ensures business continuation in case an unfortunate event takes place as the remaining business partners or shareholders can buy the shares of the deceased, retired, or disabled partner. Second, in requiring the involved parties to sell their shares to each other, it prevents an outside party from suddenly gaining a huge stake in the business and potentially altering the way the company is run. Essentially, it functions as a hedge against sudden extreme changes in company leadership and in the corporate power structure.

Debit Loan Account Insurance

Debit loan account insurance covers a share holders loan account, the seed capital and loans made to establish the company or money lent to the company when other loans were not available. The loan account is due and payable to the estate of the deceased shareholder by the company. The life insurance is owned and paid for by the company and provides the cash to settle the loan on demand by the deceased’s executor.

Credit Loan Account

Credit loan account insurance covers the estate of a deceased shareholder for loans that the company made to the shareholder. The loan is a liability in the estate of the deceased shareholder and will form part of a claim against the estate. Available cash in the estate will be used by the executor to pay the liabilities and if sufficient provision has not been made, the beneficiaries of the estate will recive a reduced inheritance.

Contingent Liability Insurance

Contingent Liability Insurance covers all debts that the company may have at the time of the death of a shareholder. Typically the creditors request a personal suretyship from all the shareholders to as security for the credit facility.On the death of a shareholder, the full loan becomes payabe. A life policy owned by the company on the life of the shareholder/s provides for the cash to settle the outstanding loans.

Group Life Insurance

Group life insurance is life insurance that is offered to a group and is usually offered by companies or other large organizations. Many companies offer life insurance to their employees in the form of group life insurance as part of a benefits package to generate incentive for employees to work for the company.

Often, people who get life insurance as a part of a group are required to pay significantly less than they would if they were to purchase it on their own. This is because companies often get deals on policies if they buy them in bulk. It is common for employees to use a part of their paycheck to pay for the life insurance premiums. Term life insurance is the most common form of life insurance offered by companies for group life insurance.

Key Person Insurance

Key person insurance is a life insurance policy taken out by an organization or business on the life of a key executive, employee, partner or proprietor to protect against the loss of value, revenues or profits of the business. They are also the beneficiary of the policy. It is also referred to as the key man insurance or key employee insurance.

A key person is someone whose overall contribution is important in the operations of an organization. In a small business, the key person would likely be the proprietor. In a large organization, it would be the partner, principal shareholder, executive or a key employee. For example, a key employee is injured, has poor health or dies; the payout from the policy would be used to offset the cost of recruiting and hiring a replacement. This ensures the sudden loss does not affect profitability of the business.