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It's vital for all businesses to insure key personnel

By unknown | Feb 03, 2009 | COMMENTS [ 0 ]

When setting up a business one considers the financial risks that one and one's family might face and what measures one can take to negate those risks.

When setting up a business one considers the financial risks that one and one's family might face and what measures one can take to negate those risks.

One always thinks of how a business should be structured, but so often one overlooks the risks relating to key people in the business.

This does not only relate to new businesses, but with the shortage of good and skilled management in South Africa, it relates to small and large successful businesses alike.

Business assurance ensures continuity of the business and in the case of an unfortunate incident, can and will cover financial shortcomings.

It always amazes me how much time companies spend reviewing plant and machinery and all other types of risk cover, yet forget to insure their primary assets - their key personnel. I believe the onus is also on the key persons themselves to discuss the importance of insurance.

There are many ways to provide for business continuity. There are differences between insuring to buy shareholders out, as distinct from replacing a key person.

When it comes to the sales of shares, then a buy-and-sell arrangement is essential. This is an agreement between shareholders or partners whereby they agree to purchase the shares, or interest in the business in the event of death or permanent disability.

This payment could be funded by life assurance. It ensures a fair price for the business interest on the one hand and also enables the surviving parties to increase their ownership of the company. Without an arrangement like this in place, one could end up being in business with spouses and/or children who are now stakeholders. This is the last thing the partners would want.

When it comes to replacing skills lost because of death, life insurance on that individual's life will help in finding a replacement for the key person. The cover should also include the financial costs involved in sourcing and hiring the new individual.

If a business has an overdraft, business assurance is a useful mechanism to cover this debt in the event of death.

I have come across many instances where the owner of a business has died and the proper planning and business assurance has not been in place. This results in awful stress and difficulties for families that have always relied on the deceased's income from the business.

I have seen large companies suffer and slump because they failed to recognise a particular individual in the company who had special, irreplaceable skills.

I urge business owners and shareholders to ensure that they (and their heirs) do not find themselves in a less-than-favourable situation due to incomplete financial planning.

l The writer is a director of Pioneer Financial Planning. Visit or e-mail


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