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Vaccinate Your SME Against Your Senior Staff Going Under

By Sam Ebbs, Wealth Manager, Holborn Assets

Over the past few years, the number of SMEs operating in Dubai and the UAE has rocketed. But how many of these companies are looking after their own interests the way they could be? One area that is often overlooked is insuring the business (and, indeed, the families of the business owners) against the impact of death or critical illness. Let’s face it – bad things happen. Be prepared.   Companies often have insurance in place to cover contents, equipment, professional indemnity and – as is now mandatory by UAE law – medical insurance for members of staff. But what would the situation be if one of the company Partners were to die unexpectedly and there was no Business Insurance in place to cover the loss? Some SMEs would rather not think about it. Because what happens next can be dire: the SME can be faced with the prospect of the family of the deceased Partner getting a say in how the company is run – or the family of the deceased Partner can end up penniless. Either event can be disastrous for all concerned. And yet it’s so easy and cost-effective to protect against! Every company situation is different. But what ALL companies can usefully monitor is the extent of their exposure to this risk – and the level of cover an SME needs as part of a robust plan to manage risk and senior staff succession. 

Partnership Protection

Simply put, Partnership Protection allows a company to stay in control. In the event of the death of a Partner, a sum equal to the value of the Partner’s share of the business is paid out. The policy is owned by the company, the premiums are paid for by the company and, in the event of death, the proceeds of the insurance go to the company. The Partner is simply the life insured. When setting up the policy, the Partners would also be well-advised to put in place a Cross Option Agreement or Double Option Agreement. This agreement means that the family of the deceased Partner would receive the monetary value of their share of the business. At the same time, because the business would immediately have the funds available (from the proceeds of the insurance policy) to pass to the deceased Partner’s family, the business would be able to retain ownership of the shares (as the transaction buys the shares of the deceased Partner from the family). This can be invaluable for a business for many reasons, including:

  • Without the insurance, the business may not have the funds readily available to buy out the deceased Partner’s shares; the resulting chaos at the highest level of management could go on indefinitely.
  • All the Partners know from the beginning when setting up the policy that their family will be financially looked after, at least to the value of their share of the business.
  • The remaining Partners wouldn’t necessarily want the family involved in the business if the Partner died. Therefore having the insurance policy in place with the Double Option agreement is often quite rightly viewed as a sine qua non of an effective SME Partnership Protection insurance package.

Partner’s Critical Illness Insurance

Another area that could be included here is a Partner’s Critical Illness insurance. In the event that one of the Partners were to contract a critical illness and wanted to retire from the business, would the business have the funds available to purchase the share value of the leaving Partner? A policy can be put in place to cover this area of Business Protection planning if required.

Key Man Insurance

Imagine you were running a Restaurant, a Graphic Design firm or a Sales organization. What is the value of your head chef, your head designer or your sales director to your business? Are they easily replaceable? What would the financial impact be to the business if they were to die unexpectedly? What would the financial impact be to the business if its key figure were to get sick and not be able to work indefinitely? What would the costs of finding their replacement be and how long would this take? Could the business continue without them? All the above scenarios and questions relate to Key Man insurance – another important area of Business Protection for some companies. Policies can be put in place to protect the business in the event a key member of the business was to die or become too ill to work. Now, this may be more applicable to some businesses than others, but again these are questions to ask and address to make sure your business is not exposed in any way.

What Are the Costs Involved?

The interesting thing about Business protection is that it often offers excellent value for money; it is an inexpensive way to make sure business and families are protected in the event of the worst happening. For example, here’s a putative case study. Let’s take a business here in Dubai with three Partners, each of whom has an equal share in their business, valued at $6m. The ages of the Partners are 45, 37 and 43. In terms of premiums, this would tot up to $1,035, $280 and $473 per month respectively – with the total for the company to pay each month amounting to $1,788. So each Partner is covered for $2m, and in the event of one of their deaths, the Family will immediately receive $2m and the remaining two partners receive the deceased partner’s shares. The younger the age of the partners the lower the cost is too. Let’s look at another scenario where there are two partners in the company. The company is valued at $2.5m and the ownership is 60/40. The ages of the partners are 43 and 37 and they have $1.5m and $1m of cover respectively. In terms of premium, this works out to $307.72 and $147.04, so a total monthly outlay for the company of $454.76. Again, it’s a relatively small cost for very good protection in place for the business, its owners and their family. Now, the above figures will vary from individual to individual based on nationality, state of health, amount of travel, smoker status etc – but these are financial figures from real life. —————————————————————————– Here at Holborn Assets, we are more than happy to show you how the financials could work for the particular circumstances of your SME. Just drop me or one of my colleagues a line for a complimentary overview of your options to protect your business against the worst eventuality.

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