'The Sum Insured to the Correct Recipient in a Timely Manner'. How hard could it be?

Content written by Terry Brain - Director of Milbourne Insurance Solutions

My career has been built around business insurance and estate planning. 

Initial conversations with a new client were usually centered upon their existing policies, their understanding of those policies and their expectations in the event of a claim. 

On too many occasions, across several decades, I regularly discovered that clients’ expectations were not properly aligned with policy ownership structures.

The most common error occurred in business succession arrangements was where the enterprise owned policies on the lives of shareholders, in the absence of any form of Shareholder’s Agreement, or underlying premium funding mechanism, or Buy / Sell Agreement. 

Just to add spice to the transaction, an enthusiastic, but poorly informed accountant, had been claiming premiums as a business expense since the policy inception dates!

An error common in professional firms was for all Partners except the life insured to own a policy on his / her life as Tenants in Common in equal shares. 

A and B own the policy on C’s life; A and C own the policy on B’s life; B and C own the policy on A’s life. What could possibly go wrong?

The problem is that many professional partnerships can be larger than three and sometimes, partners choose to leave for better opportunities. 

On one occasion, conducting such a review for a new client, I discovered that the business still had three departed partners with equitable interests in the lives of their former colleagues. 

In the event of a claim, the insurer would have been obliged to pay the departed partners, in accordance with each policy schedule!

The selection of a more practical policy ownership structure would have resolved all the common mistakes listed above. 

A regular audit, not only of policy ownership, but the related documents such as Shareholders’ Agreements, Buy /Sell Agreements, together with Directors’ minutes pertaining to the renewal or change of purpose for keyman policies can ensure that when claim time arrives, business related covers will truly serve the purpose for which they have been implemented.