Untimely death is a reality with which most of us hope that we do not have to deal.
Having become aware of two such deaths recently the importance of risk management was again highlighted to me.
We all need to evaluate the risks to which we are exposed. And then we have to decide whether we pass those risks on to an insurance company or bear them ourselves.
A person in business is subject to particular risks arising from an untimely death. Some of the problems that might arise are –
• It may take some time to get a business back up to full steam with the death of the owner - particularly one who has tended to carry the recipe for business success around in his head.
• Existing problems, perhaps caused by the absence through illness of the business owner prior to death, may be aggravated.
• Business life tends to go in cycles. - the death of a business owner that coincides with more difficult market conditions, could result in problems being faced in ensuring that the business survives, and that value is maintained
• With the death of an individual perceived as integral to the business credit terms may become restricted, creditors may press for payment and debts can be more difficult to collect on a timely basis.
Whether the business is to be retained or sold, risk protection such as life insurance, can play an important role in protecting the business against forced sale and serious loss to the estate and the beneficiaries.
Insurance cover on a key person (or people) in the business recognises the loss that person can have on the viability of the business. The key person may be the owner but could just as easily be a member of the management team in a larger business.
Properly arranged key person insurance can remove risk by providing funds to pay the salary of an interim manager, to meet debts, to provide cash while the future of the business is determined and to strengthen the credit position of the business.
In effect the cash is buying the time for the future of the business to be sorted out without permanent damage or loss being sustained in the meantime.
Insurance is one issue in managing the risk. It is also important to ensure that an appropriate will is in place. Consideration of instructions with regard to the continuation of the business, providing for the surviving spouse and treatment of children (particularly if one or more is involved in the business) are important.
