In a separate post, I gave 10 reasons for an employer to have a group life insurance scheme in place. Those reasons are genuine and worth considering deeply by every employer. But that should not be the end of the story as far as employer-sponsored schemes are concerned. Group life insurance scheme offers protection against the premature death of employees, but other needs exist in a business situation. This article looks at five circumstances where life insurance becomes desirable in a business context.
1. Partnership business
In a partnership business, the death of a partner may mark the end of the business if adequate plans are not made in advance. In the event of death of a partner, it may become necessary to pay out his share of the business to the spouse/dependants and this may wreck the business, particularly if his percentage ownership is substantial.
A life insurance cover on each of the partners is a clear and cheap method of providing for this situation. In the event of death of any of the partners, the insurance money can be used to buy out the deceased partner’s share of the business. This will help maintain the financial strength of the company as the business capital is not affected negatively.
2. Directors’ shareholding
Closely related to No. 1 above is the shareholding of directors in a limited liability company, particularly a private limited liability company. Should a shareholder, most especially a major shareholder, pass away, the proceeds of a life insurance policy on his life can be used to buy out his share of the business. Again, this will ensure that the fortunes of the business are kept intact.
3. Periodic Income
It is possible for a business outfit to become a subject of inheritance by a minor dependant (e.g. son or daughter of a deceased business-owner). Since the new owner is still a minor, it would be necessary to appoint a manager (probably corporate manager) to take care of the business until the beneficiary becomes an adult. A life insurance policy then serves as a very good method of providing periodic income for the payment of the manager’s salary, or part of it, right from the time of death of the business owner. Such insurance plan can also provide income for the upkeep of the child till his/her adulthood.
4. Key staff
There is a common joke that “angels are not equal.” Same applies to employees – they are not equal. Some employees are key to the survival of the business so they need to be given special attention. Should a key employee die in service, it may become very difficult for the company to find a replacement for him immediately. And if this becomes the case, the company would continue to lose money for as long as it does not have this key staff.
A Keyman insurance can be arranged to pay a certain sum of money in the event of death of a very important staff of the company. This insurance payout will compensate the company for any loss suffered as a result of death of its key man. The money could also be used to hire another key officer who may be very expensive to employ.
Reference to key man here means both “keyman” and a “keywoman.” It could also be a “keydirector.” The organization will definitely be in a position to identify its key officers who may not necessarily be the senior staff of the company.
Many organizations give loans to their staff and directors. What happens in the event of death of such officers? This presents an organization with another need for life insurance. A company should ensure that life insurance is arranged for each and every one of its staff and directors who have taken loans from the company (most especially large loans like staff mortgage). Similar insurance arrangements should be made where the employer guarantees loans (e.g. bank loans) for its staff or directors.
One may want to argue that the company’s employees’ group life insurance scheme would protect the employer against this risk. No, using the group life insurance benefits as collateral for loans would defeat the original purpose of the scheme which is to provide for the employees’ dependants. The amount of benefits payable under a group life insurance scheme is also fixed and may not necessarily be the same as the amount of loan standing against the deceased staff.
This fifth need can be extended to include the company’s individual customers who may owe the organization. The company can arrange life insurance cover for them and, of course, the cost of such cover may have to be borne by the customers. The picture is much clearer when one takes a look at the number of companies that have gone burst on account of dead customers’ indebtedness.
Clearly, in a business setting life insurance goes beyond the often cited employees’ group life insurance scheme.