MSV Life billboards appeared alongside some thoroughfares asking two sobering questions last week: “What if you died yesterday? Would your dependents cope?”

Typically speaking, when a sole trader dies, the business dies as well. Sole traders should consider additional cover to pay out on death or serious illness

Those questions should set people thinking about the financial buffers or how well protected their families and their dependents will be when the inevitable happens, sooner or later.

The billboards are part of MSV Life’s life insurance awareness campaign which runs throughout September. Business owners – everyone from sole traders, family business leaders, and partners – would do well to examine their succession and contingency planning and risk management. Here’s another sobering question: “What happens to your business and your dependents when you die?”

“We do meet people who are aware of the risks families or dependents face when they pass away. People might often think about life insurance but do not always realise the full implications or are unable to quantify the cover they require,” MSV Life chief officer Stuart Fairbairn says. “Setting trading risks aside, death and serious illness inevitably have a tremendous impact on a business and the people who depend on it in one way or another.”

Standard individual life insurance policies are usually suitable for sole traders, whose dependents will need to have the deceased person’s income replaced. Potential capital loss – goodwill and assets – also need to be considered from heirs’ perspectives.

“Typically speaking, when a sole trader dies, the business dies as well,” Mr Fairbairn explains. “We ask sole traders to consider additional cover to pay out on death or serious illness. On death, it is quite easy to quantify – you need to replace the income and you need to have a capital sum relative to the value of the business. Illness complicates matters. You do not know how serious the illness is going to be, what life expectancy will be, and if the sole trader would want the business to continue.

If you are seriously ill and you are unable to run the business for a few months, would you be able to pick up the business and keep it running? We talk about a plan that would pay out on diagnosis of critical illness which would then enable you to have money so that you do not need to worry about the business or perhaps bring someone to help.”

Mr Fairbairn says premiums are very accessible and can be deducted as a business expense, depending on how they are structured. Any beneficiary can be named and a policy may supersede a will.

Family businesses and shareholdings awarded to a second generation provide for more complex situations, particularly if some children want to continue the business and others do not. Children are typically compensated equally.

Family business leaders must consult professionals to plan the business’s future ownership and then tailor policies to the plan. One option could be a life insurance policy on the owner paid for by the business with the business or an individual as the beneficiary.

Businesses like partnerships should examine plans set out in documentation which should spell out what happens on the death of a partner. Shares would likely be handed over to personal legal representatives or the family estate but shareholders may have the right to acquire those shares from heirs within a specified time period. Valuation is a major issue.

A legal agreement which surrounds the insurance policy would state how the business is valued, whether in terms of a multiple of profits, an average of profits, or a multiple of revenue, usually depending on the industry the business operates it.

Small businesses face other complexities. In the case of an accountancy practice, for instance, owners must lay out what happens to shares when they are inherited by a person’s family. Would they want the heirs to be involved in the business?

The inheritors might not want to be involved or the partners would not want them to be. Remaining partners often close the partnership and start another.

“The simplest way is to write a business will to indicate what you want to happen to the business and who you want involved and how that will happen,” Mr Fairbairn pointed out. “It is a succession plan, not necessarily a legal document. People do not do this enough. The legal firms are starting to do this. The business or the partnership will take out life insurance policy on each individual partner to the value of their shareholding. On death of one, the proceeds will be paid to the business and the business will then have the right to acquire the shares from the deceased family. This is where a legal agreement can be established. If the business wants to buy the shares off the deceased’s family or the deceased family wants to sell up, they have to follow the agreement. Valuations need to be agreed in advance.”

Plans can pay out on diagnosis of critical illness

Key person insurance or loss of profits insurance should be taken out when a business is established. As a business grows, and the team expands, anyone who is important – people with contacts or with specific qualifications – would ideally be covered.

A key person can be the owner, creator, or top salesman whose loss may lead to reduction in sales, projects not completed on time and even loss of confidence from the banks.

Group life insurance is also becoming popular. Two particular products, group life and professional group life insurance for six people or more for professionals and partnerships are not prohibitively expensive.

Any definable group working together can be covered, Mr Fairbairn said.