Family businesses can be complex on many levels, and their Life Insurance needs are no exception.
I’ll explain with an example of clients of mine, a family and their family-run business.
Background
The family business was started by the patriarch of the family. It is now run by him and his four sons, between the ages of 28 and 42.
The four brothers each have a division of the business that they handle. One handles key accounts in the Middle East and North Africa market; one handles sales and key accounts across the Americas, one handles Asia, and the fourth brother heads the business operations.
Their father has two significant roles: he handles the company’s largest and oldest key accounts and plays a role in the business’ financial management and stability. He’s also got a few key relationships with the banks in place that allow the business healthy lines of credit and other commercial facilities.
The business is cash-rich, with its assets far outweighing liabilities. The family is well off financially. The brothers are all married, and three of them have children.
The Business Structure
The business is structured so that the patriarch is the largest shareholder, and each of the brothers is listed as a partner on the trade license.
The agreement in place states that in the event of the father’s death, his shares are divided evenly amongst the sons. This would leave the oldest son with the majority shares – a typical structure in medium to large family businesses.
Each brother (and the father) is left to procure his own Life Insurance policy.
Key Risks This Business Faces
Now that you know a little about the business background and structure, let’s dive into the key risks this business faces.
A lot is riding on the father’s involvement in the business
Apart from key relationships with their largest and oldest clients, he also plays a key role in ensuring the business’ financial health. He holds the long-standing bank relations and works closely with the CFO on finances.
Will these key client accounts change when he is no longer involved in the business? Is it possible that his successor does not manage the accounts the way he did, leading to the loss of those accounts?
On another front, how much of the bank’s cooperation and support do they stand to lose should he not be in the equation anymore?
Each of the brothers heads separate key accounts
While the brothers are all involved, they all handle entirely different markets and full workloads. Should the worst happen, and one of them passes away, it is unlikely that the other brothers can step in and take over the deceased’s role and responsibilities.
Family businesses in this predicament face two options: one is to have the deceased’s spouse step in and take over their role and their shares in the business. Not always desirable because they might have no prior relevant experience to justify the takeover.
The second option is to buy out the deceased’s brother’s shares, compensate the deceased’s spouse and children fairly for the shares, and find an able candidate to take over his role in the business. (More on this below under Life Insurance Needs)
What happens if Critical Illness strikes?
With the father and the four brothers being so integral to the running of the business, what happens if one of them is hit by a critical illness of some form, putting them out of commission for months or longer?
Remember that the emotional load of losing a family member or of having to watch them suffer through a critical illness also has an even more significant emotional burden to bear than financial. An event like that could result in a drop in productivity, absence, mistakes, or other errors on the part of the rest of the family members at work, that could continue to hurt business.
Their Life Insurance Needs
Here are the major Life Insurance needs this family and their business have:
Keyman Insurance for each brother and the father
Since we can draw a direct connection between the loss of one of these key persons and the company’s finances, Keyman Insurance is an essential part of their Insurance toolkit.
Keyman Insurance would ensure that the company is paid out a lump sum of money if any of the insured key persons passed away. This lump sum is estimated so that it covers the resulting loss of income, training, and development costs for a new person who takes on the vacant role, and a financial safety net while the business finds its feet again.
Read more about Keyman Insurance here.
Partnership Insurance
Partnership Insurance helps ensure that the surviving partners in a business have the financial ability to buy out the deceased partner’s shares, without disrupting the deceased partner’s family income.
Read more about protecting your business with Partnership Insurance here.
Individual Life Insurance
Outside of the business, each brother and the father have their independent Life Insurance needs that allow for wealth transfer, wealth protection, cover inheritance tax, and loss of income.
Their individual Life Insurance policies ensure that they leave behind enough for their spouses and children to continue to lead comfortable lives, should anything happen to them.
Critical Illness Cover
Although only purchased as a rider alongside a Life Insurance policy, Critical Illness cover is a crucial piece to have in place for the father and each brother.
Should any of them be faced with the hardship of dealing with a Critical Illness, a lump sum of money would be paid out to them and their families to cover medical bills, loss of income, and perhaps even mitigate some of the resulting losses to the business.
And this isn’t even an exhaustive list of all of their Insurance needs, but the most important ones.
Life Insurance is an essential tool for family businesses when it comes to their financial planning. The impact of any kind of loss within a family and their family business is felt all around. The lines are blurred between work, home, and family.
Because of this, well-structured Life Insurance and Financial Plans have to stretch out as safety nets under every element involved – each of the family members’ job roles, their spouses, children, homes, as well as the business.
