Wading through the corporate insurance minefield

Tim, we have been reviewing the insurance requirements for our company. There seems to be so many types before we have even considered our staff or personal requirements. What do you suggest should be the areas we focus on initially? – Raju

It can be daunting when you have been exposed to the many insurance solutions out there. Hence, we strongly recommend (well, we would!) you get some insight from the experts to ensure you address your needs in the order of priority.

I do not have the details of your predicament but I will give you my views based on the company requirements alone and a potted description in no particular order. You may need none or all of the following examples so seek some guidance:

Loan cover This, as the name implies, may be demanded by a lender for the principals of the company to carry life cover to the same amount as the loan, for the term of the loan. This cover can be written in multiple lives /first death basis to ensure that in the event of the demise of any principal, the remaining board will not have to bear the loan without his/her support. Not all banks demand this cover but remember, this is for the benefit of the company not the bank since you would not want to burden your surviving partners unnecessarily.

Key man This works slightly differently since it has a living benefit too. You need to identify who the key men in your company are? If they were to die or contract a serious illness, what effect would their absence have on your company: Lost deals, the amount of time to recruit the replacement for the key position or replacing the specialist knowledge of the deceased. After working out the cost of the above, the company can cover their key men (persons) and a policy can create cash for the company when it needs it most.

Double option agreement This, otherwise known as shareholder protection, is for the principals of the company to carry individual cover to the share value of their share of the company. On the death of a principal the proceeds (cash) become the property of the remaining principals. This money is then used by the remaining principals to buy the deceased's share of the company from his estate. Therefore, the company does not have an unwanted partner and this cover is backed up with a legal document to this effect signed by the principals. This is normally written on a five-year renewable term so it can be altered as the company grows.

Remember, the uses of insurance in all its applications is to create cash when it is needed most. You can manage your risks by blocking large amounts of capital should the inevitable happen. However, in most scenarios this is just impractical so we use various types of insurance to help protect what we hope to achieve and give us the financial confidence when these challenges occur in business and life.

- Tim Searle is CEO of Globaleye, a leader in financial services for the Middle East with over 4,000 clients. Send queries to: money@business24-7.ae

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