Top five concerns for business partners' insurance
When considering insurance for businesses with multiple partners, do we really understand what their concerns are from an estate planning point of view?
Many insurers invest a lot of money in developing sales and marketing tools for insurance to protect business partners in the event of premature death or becoming totally and permanently disabled. This is generally because premiums are significantly higher than for your average consumer insurances.
But when considering insurance for businesses with multiple partners, do we really understand what their concerns are from an estate planning point of view? From my experience – and from an estate planning point of view – this is what I see as their top five concerns, in the following order:
Resignation from the business
There are many circumstances in which a partner wishes to resign from a business. It may be a career change, disagreement between business partners, or personal circumstances that determine a partner wishes to take no further part in the business. As a financial planner, there is no magic wand or facility to cater for this event. However, a properly executed shareholder agreement will provide for which formalities are to take place if this occurs. As an example, the agreement may state that in the event of a resignation, payment for the share of the business is spread in quarterly instalments over two years. This will allow for the existing business partner(s) to manage cash flow.
Not much really needs to be said about this; however, good succession planning is a must. Also, the shareholders' agreement needs to stipulate what is to occur in this event. Once again, it may be a payment plan to the retiree or the transition to a successor.
Sick leave entitlements
Generally, this is an area that is not really spoken about or considered. Most business partners feel that they have an entitlement to unlimited sick leave. The best way to overcome this is to have the business partners agree to a term when sick leave entitlements will end. You should consider attaching an income protection contract to cater for sick leave entitlements thereafter. Providing set ground rules will eliminate any false entitlements.
This is something that never really crosses the minds of business partners until it happens, but really needs to be considered from when they are getting into business together. Most shareholder agreements will stipulate that a significantly smaller share will be payable to the fraudulent business partner.
Premature death or becoming totally and permanently disabled
Consideration needs to be given to this possibility and the most economical way to address any financial impacts is to protect the lives with a life insurance contract.
We all know that not everybody is insurable. However, having your estate planning advice set out in this manner will provide an alternative for the uninsured to be bought out. For example, it may revert to the resignation wording on the shareholders' agreement.
There is an enormous amount of work that goes into estate planning for business partners. Previously, risk advisers only got paid if insurance was written and accepted. Many advisers now are working with their accountants and establishing a fee to put in place a buy/sell agreement and shareholders' agreements. Having a fee for the set-up cost ensures that you are remunerated for the implementation of the agreements and any insurance writings, whereby a commission received could be classed as a bonus to the estate planning process.
David Spiteri is national risk manager at Centrepoint Alliance
Other articles written by Mr Spiteri can be found here:
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