Moreover, if the sole trader has plenty of cash in the bank to cover any immediate concerns that might crop up, this again makes the need for specialist business protection policies less obvious.
However, he adds: “You could use a small KPI policy to help pay for the winding up of the business in an orderly manner.”
Key person and succession
For Mr Conner, key person insurance (KPI) is “all about smoothing the path for the business should the worst happen and a key individual becomes critically ill”.
KPI, as discussed in article 2 of this guide, whether through a life assurance, critical illness or an income protection plan – or even a mix of all three – can provide a cash injection (a lump sum or a flow of income) to the business if a key person dies or suffers a serious illness or injury.
Founder key person cover is important because it could mean the death of a business should the founder himself or herself die, unless steps have been taken to avert the problem through setting up a properly financed replacement strategy.
Healthcare can also help with rehabilitating key staff back to work and mitigate the costs of replacing a key person, thereby reducing the necessity to provide a suitable successor.
Mr Moulton adds: “While health insurance may not provide a financial cushion as others forms of business protection may do, by doing a job of prevention and helping to keep employees well and working, healthcare cover may help to lessen the likelihood of the unexpected loss of key employees.”
Moreover, a good healthcare package, according to Mr Moulton, could also help recruit and retrain key personnel.
Six ways key person cover can help with succession planning
Drewberry has compiled a short list of ways in which potential problems around succession planning or replacing a key member of staff can be mitigated through key person insurance (KPI). These are:
- Paying for recruitment/training costs for a replacement.
- Compensating for lost profits due to the key person’s absence.
- Compensating for a loss of knowledge about key business processes.
- Covering losses arising from lost business contacts.
- Difficulties in raising finance for new developments.
- Repaying outstanding loans/investments/venture capital injections.
Shareholder protection
Shareholder protection can also help with succession planning. Mr Conner elucidates: “With shareholder protection, the issue is the family member who inherits the shares on the death of a shareholder might not have the business acumen or even the desire to run the company as the shareholder did.
“However, they could still be entitled to a slice of the profits. This can place a significant financial drain on the company.”
Moreover, if the inheritor decides to make money by selling their shareholding to a competitor or consolidator this could have “significant ramifications” for the future of the business, he adds.
By putting protection in place, this mitigates those ramifications by putting in place a series of legal agreements that set out how shares are to be managed if a stakeholder passes away.
