Quigley's Fine Wine and Champagne Merchants is looking to take out some business protection in the event that one of the four directors dies. All four - Ryan, Steve, Dave and Jack - are in their mid-forties and in generally good health, although Steve had a mild heart attack a few years ago. What issues should they consider?
Ian Smart, Bright Grey
The first issue any small business needs to consider is what they want to protect themselves against. Is it the loss of profit they may suffer following the loss of a key person, being able to repay any borrowing, or cementing the ownership of the business following the death of one of their number? It may be all three but they need to decide which they want to address.
The second issue is how to put the cover in place and what cover it should be. Assuming that the business is a company, the directors have a choice of whether it is the plan owner or whether each of them will take out a plan on their own lives, writing this under an appropriate business trust. Each has different taxation consequences and different levels of future flexibility and it would only be after a full fact find that a firm recommendation could be made.
There is also the issue of Steve's heart attack. He may be able to get life cover, but it will almost certainly be rated, e.g. if he is a non-smoker, his BMI, cholesterol level and blood pressure are normal without medication and he did not undergo angioplasty or coronary artery bypass graft surgery, he would probably be accepted with a loading of +200% to +250% extra mortality. This could make the cover look quite expensive. Unfortunately, there is also the possibility he may not be able to get cover and they would need to consider how to deal with this should something happen to him in the future.
Matt Morris, LifeSearch
There are two main types of cover that Quigley's should consider: key person cover and shareholder protection. Most people assume that it is only key person cover that they need when in fact they would be well advised to look closely into shareholder protection too. A full fact find of the business, its turnover, profits and the needs of the directors is crucial to determine the type and level of cover needed.
The main aim of key person insurance is to ensure that the loss of someone important to the business is compensated to cover the financial impact on the business. However, not every director is a key man or of the same value so they should consider each case individually depending on each director's value to the business.
Shareholder protection will provide a payout to Quigley's that can then be used to repurchase the shares, if required, which may have passed to a beneficiary who does not have the skill or experience to make a worthwhile contribution to the business.
Steve's health is obviously a complicating factor and may well result in a rating of some kind. If he is paying significantly more than the other directors, they should consider premium equalisation, which would spread the cost of this rating across all the directors. They also need to consider writing their policies into an appropriate trust and consider a cross-option agreement to protect any business property relief that the partnership's assets or shares attract.
Stephen Crosbie, AEGON
Each director could take out life protection under trust for the benefit of their co-owners. On the death of one, their shares can be purchased by their co-owners and the business can continue. While this covers Quigley's if one of the directors died, there would not be a payout if them became critically ill.
Steve's heart attack means he may only be able to get life cover with rated premiums under a business protection arrangement. It would be worth speaking to an underwriting helpdesk to see what cover he could get.
Where all the directors can get CI, they would each place them under trust for the benefit of their co-owners. However, if Steve cannot get CI, it would not be considered commercial or fair if he could benefit from the policies of his co-owners - very important if the arrangement is to be IHT efficient. However, if he had the money needed for the others to buy his share or is able to borrow it, he may be able to take part in the arrangement.
Protecting the profits that the directors and other key employees generate may be as important to the business's future as controlling who owns it. Key person insurance should also be considered but Steve is likely to be excluded from the CI element due to his previous medical condition.
There are many ways to ensure Quigley's and it's directors obtain necessary protection so they should speak to a financial adviser about their specific requirements.
