'Keyman' insurance cover goes a long way in ensuring business continuity

This is now a growing trend – especially amongst the established family businesses where the owner is getting ready to pass on the baton to successors.

A large one-time premium life insurance makes funds available when successors need them most. Let’s consider what happened at a Dubai-based family business owned by an expat.

Disaster in the making

The managing partner died of a heart attack at the age of 42, despite there being no history of issues with the health. Even though the company announced a successor in just one week to take on the responsibilities, most of its banks pulled back within three months and others restricted their funding support.

The company settled Dh500 million in a short time to satisfy the banks. But this is a huge liability for any business and led the company into a liquidity crunch. Nine months on, the new chairman is under intense pressure from within the family.

He has been forced to listen to their suggestions, even from those members who were never around and do not understand the business. It brings on clashes on decisions and costs time.

The company had six board members who were not as active, but retained their positions being part of the extended family of the predecessor. At one time, the company was known for honouring its commitments, but now was stressing itself under a liquidity crunch.

Belated wisdom

All because of the untimely demise of the business leader. The biggest regret was that we had a discussion about taking a $100 million life insurance cover just three years ago. But they postponed for various reasons, and they are now regretting it.

These are the words of the successor: “The biggest regret was we did not take the decision on time to proceed with insurance…”

Companies that rely on the owner’s contribution suffer in such instances. The problem comes in many forms and shapes. – with the succession, business continuity and other issues. And in many cases, go into decline.

Banks are reassured

The growing trend now is to take a life cover on the business owner – where he purchases a big policy by paying a one-time premium. This could be financed through a bank loan for as low as 1 per cent of the premium amount.

In the case of his or her death, the full amount is transferred to the bank, which deducts the premium amount before passing on the insurance pay-out to the client’s beneficiaries.

For example, if a life insurance policy of $100 million is issued with a $20 million one-time, the insured gets $100 million for as low as 1 per cent interest on the $20 million, or $200,000 per annum. In case of the insured businessman’s inability to function or in extreme cases, death, the beneficiaries will get the balance insurance payout after the bank collects the $20 million premium it financed.

This way, the key shareholder’s life insurance not only helps successors to benefit from the pay-out during the initial days of succession, it helps them to gradually take-over and steer the business.

Businesses in the Gulf countries need to pursue the ‘keyman’ Insurance, which could become a mandatory requirement for securing bank loans in future as it helps re-assure lenders of the continued success of the company.

These policies provide business owners and potential successors peace of mind… and immediate financial security for the family.