Key man insurance workaround

[Hannes Botha]

So about 18 months ago we upped our insurance after a nasty incident with a Mercedes that someone crashed into....wait, that's another story. At the same time me and my two partners (brother and sister) decided to take out key-man insurance. Basically what it entails (for those that do not know):

If I die, my shares automatically goes to my wife. If he dies, his goes to his son and daughter. If she dies it goes to her husband. This basically insures each other's life for the value of the shares, so the company can buy back the shares from the deceased's family. Seeing that I don't want any of their families involved in the business and I know the feeling is mutual.

The problem has risen that in our current climate, overheads has increased (since Feb 2013 to Feb 2018) by R140k pm while GP has only gone up R90k pm. So I need to start cutting costs (I know...I know, insurance is a dangerous place to start, the situation is dire) Insurance is up by R9k per month in the same periods

Our keyman insurance is obviously quite costly because of our collective BMI's (another thread altogether) and one of us smokes (not me).

What I was thinking (mods, apologies if this should be in the legal section): If I leave the shares to my partners in my testament, and if I get a binding contract transcending death (tricky, right?) that they will pay an amount of say R10k/month to my family until the value of the shares has been met, could that work?

How do/did you handle the same kind of situation in your business'?

p.s. This is obviously not the only place we will be cutting back...

[Dave A]

What I was thinking (mods, apologies if this should be in the legal section): If I leave the shares to my partners in my testament, and if I get a binding contract transcending death (tricky, right?) that they will pay an amount of say R10k/month to my family until the value of the shares has been met, could that work?

And if they don't pay?
And if there is an argument about the value?
And if management and the fortunes of the business takes a change in direction?
And if the wind blows from the North instead of the East as expected?

[Scott H]

Sounds tricky, but I'm sure you're used to making difficult business decisions. Yes, cancelling an insurance policy can be very risky, especially as there is no guarantee you'll be able to get similar cover in future. Also, if there's no life cover in place will the survivors really be in a position to buy the shares (even over a longer period of time), especially if the business is producing even less profit because you're not around? Here's a thought, however, to discuss with your advisers. You say that the cover is 'for the value of the shares', but that 'the situation is dire'. Are you sure, therefore, that the cover is still set at the correct amount based on the current and projected value of the business/ profit taking into account what the agreements say? You would need to keep in mind, however, even if you need less cover today because of the situation, everyone is older than they were, so any cost savings could be outweighed by that factor alone! Definitely tricky! The bottom line is to talk though the options through with a good adviser.

[AmithS]

Good points above. Re look at the cover itself and see if its still relevant at the current business evaluation.

I personally would not go this route as Dave said what if the wind blows from the North instead of the East - people can do things for money and easily manipulate the business situation just so that they don't need to make the payouts...