How life insurance can protect your spouse if you're the co-owner of a business

15 Sep 2024

If you co-own a business, think of taking out life insurance to give your fellow shareholders the option of buying out your share when you die; thus allowing your spouse to derive the full benefit of the business, without being drawn into its day-to-day operations.

Question: I founded a successful business 20 years ago with two other people. All three of us are actively involved in its day-to-day management.

I have taken another look at my will, in which I have bequeathed my shares in the business to my wife.

Although I trust my fellow directors, I am not sure that my wife will get the full benefit from these shares, as she will not be actively involved in the running of the company.

How do I structure my affairs to ensure that she is fairly treated?

Answer: There are many ways of extracting value from a company, and if someone is not actively involved and is thought to be benefiting by more than the value that is being added, they may find the dividend flows stagnating while the executive directors improve their remuneration from other structures.

Unless your spouse or children have a desire to get actively involved in the company, it is often best to make a clean break. This can be set up as follows:

Have the company valued. You should get an independent person to value the company so that you know exactly what your shareholding is worth. This should be done annually.

Use life insurance to pay for the shares of any deceased directors. Your codirectors would take out life insurance cover to the value of your shareholding. This cover should be revised annually to take into account the increasing value of the business.

Set up a contract to commit to buying the shares of a director upon their death. This is often known as a buy-and-sell contract. Here your fellow directors commit to buying your shares in the company upon your death. This would be funded by the life insurance that they took out on your life.

What is nice about the solution is that it is a clean break. When you die, your wife would be paid out the full value of your shareholding in the company. She need not worry about your fellow directors doing things that may prejudice her income stream. She would have access to a capital sum that could be invested to provide her with a flow of income that she can control.

On the other hand, your fellow directors would have more freedom to make decisions about the direction of the company without having to consider shareholders who are not involved in it.

This solution can also be used to pay back director loan accounts without putting too much financial strain on the company.

You can also use this solution to pay out a benefit should a director become permanently disabled and unable to actively contribute to the running of the business.

There are times when life insurance can make a significant difference. This is certainly one of those instances. DM

Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to [email protected].

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.

You may write a letter to the DM168 editor at [email protected] sharing your views on this story. Letters will be curated, edited and considered for publication in our weekly newspaper on our readers’ views page.

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