Key Person Life Cover

I am a Company Director through which I run my Supermarket / Convenience Store Business. The Company currently has loans owing to our Bank of €550,000. When I took out these loans originally I was obliged by my lender to take out Key Person Life Cover, assigned to my lender, in the amount of €250,000. I also have a young family who are dependent on me and my business. The loans are not personally guaranteed.

Research has shown that 72% of SME Businesses ceased trading within 5 years after the death of the founder of the business*.

A ‘Key Person’ Life or Specified Illness policy is designed to pay your business a lump sum on death or Specified Illness.

The loss of a key employee / director or consultant can affect your business in many ways:

-      Loss of business contacts or management experience

-      Loss or unique skills and intimate industry knowledge

-      Loss of good relationships built up with suppliers, banks or distributors

-      Bank loans may be called in

-      Withdrawal or reduction of credit facilities by your bank as they become concerned about the future viability of your business

You mentioned that the Key Person Life Cover was assigned to your lender. In your situation the lump sum payout would then be used to pay off the outstanding loans balances of €550,000. However your lender at the time you originally took out these loans only insisted on Key Person Life Cover of €250,000, this would leave €300,000 still owing to the Bank by your company.

The concerns that arise in this context are:

• How  would the business continue to operate without your expertise?
• Would your spouse be in a position to run the business effectively?
• If your spouse had to sell the business, what value would be left once the €300,000 balance of the loans had been repaid to the bank?

It may be a prudent measure to have Key Person Life Cover in place for the full value of the €550,000 debt owed by the company. This would ensure that all loans would be repaid in the event of your death, which ensures your family and spouse receive the full value of the business in the event of your passing.

Key Person Specified Illness is also worth considering from the point of view of the impact on the business of you suffering a serious specified illness that might effectively rule you out of operating your business for a prolonged period of time. Should Key Person Specified Illness put in place, it could be used by your business to pay back debt, hire additional staff etc...

Your family and your business depend on you and your ability to work and earn an income. Without you, they will both suffer. It’s a sad fact that people do pass away whilst they still have people dependent on them and it’s an even sadder fact that sometimes financial difficulties are heaped upon emotional distress. However, proper planning means financial difficulty is eliminated for those you love.

Life and Specified Illness Cover can be used as a vehicle to resolve most of these issues, if set up and structured correctly.

I hope the above information gives you a good understanding of your situation. There are taxation and legal issues to consider in addition to the information provided above and it is crucial you seek out expert financial and taxation advice in this respect.

*BDO Simpson Xavier