Trevor Law: The forgotten insurance
Aug 13 2010 By Trevor Law,
Nobody likes to dwell on morbid scenarios but losing a key employee can have telling consequences for a business.
We might not hesitate to have life policies for ourselves so members of our family do not suffer unduly from financial as well as the emotional consequences of an unexpected death. But if you have your own business, have you given serious thought to what the financial fallout would be if one of your key employees or shareholders died or was absent from work for a long period with a serious illness?
How many insure against the consequences of a key employee being out of action? The answer is not many. This kind of insurance is not widely marketed and features on the radar of relatively few firms.
In January this year, Scottish Provident surveyed 230 small business owners and found less that a fifth took out keyman insurance despite the fact 57 per cent believed their company would be significantly affected if a key employee was out of action for more than six months with a serious illness.
The unhappy death of the highly successful entrepreneur Phillip Carter in a private helicopter crash flying to his Lincolnshire home in 2007 is cited by Edinburgh-based life insurers Bright Grey as a stark example of the penalty paid for what it terms “unprotected success.”
The Carter & Carter training group he founded was valued at more than £500 million before the accident. But his company had no life assurance covering his life and the result was lost confidence in the business after the death of its chief executive.
Ten months after Carter’s death, his company was in administration after management problems surfaced and its shares had been suspended. The £100 million shares Carter himself left to his estate had become virtually worthless.
Nobody is saying companies can expect consequences as disastrous as this should a chief executive or key employee suffer a serious illness or die.
But there could be many serious implications.
The obvious result is the cost of finding a replacement. Added to this burden is the impact on your business whilst you are searching and recruiting a replacement.
How will your customers, creditors and competition react if a key figure they may have been dealing happily with for years is no longer around?
There are also other implications you might need to consider that could have a significant effect at a time when the country is trying to escape the consequences of a severe global recession.
Could your bank or the executors of the estate make any calls on money, such as overdrafts, personal security or loans made by the deceased to the business?
There is also the financial impact on the family of the deceased. What would happen to the shares he or she might have? If they pass to the deceased’s spouse, do they want to be involved in the business?
