How is Life Insurance Used for Business Purposes in UAE

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Running a corporation involves responsibilities not just regarding business development and expansion of the company’s commercial operations, but also the management of its staff and personnel. This is necessary not just to keep your workforce motivated, but also to generate a positive reputation in the market. Such policies go a long way in attracting top talent who aspire to work for your company, as well as creating trust in the market regarding the production and distribution channels. What are the devices that a business insurance company may use for creating such conducive circumstances? In this article, we seek to discuss how life insurance policies may be strategically used by the company, to keep its employees motivated, as well as to drive its reputation up in the market. Of course, business life insurance may be deployed gainfully by a private player who runs a substantial local business as well, in order to safeguard their own family interests.

Uses of Life Insurance for Business Purposes

Provided below is a discussion of the key uses of life insurance by corporations or private businessmen for safeguarding their strategic interests.

Preventing Liquidation

In case the private business owner meets with an untimely death, the legatee family might have to take a call about whether to continue with the business management or to make alternate arrangements. In case the business needs to be liquidated, the family will receive far lower values for the same on the market, thus resulting in considerable losses over assets, properties, and infrastructure that have probably been built over decades. Having a pre-existing business life insurance will help the family ride over this situation, by providing the emergency funds that will mitigate the need to urgently sell the valuable family business assets and holdings. 

Creating access to Cash Value

A business owner, who is personally responsible for raising any finances that may be required for its uninterrupted operation, may consider their life insurance to be an asset for the same. In an alternate scenario, if a business is just being established, the bank may require that the applicant or the registered owner have a business life insurance subscribed to their name. This will be treated as a collateral in the case of the death of the owner. Apart from this, in normal situations too, the bank may be prepared to co-operate with the businessman during times of economic distress - upon the furnishing of the life insurance document. They may provide him with loans, or assist with the payment of supplemental or overhead expenses. Finally, assuming that the businessman operates in the small and medium enterprise domain, they may purchase a whole life policy which will essentially act as a cash accumulating policy. This may be used for financing expansion operations, or to simply let it grow and add to the retirement savings etc.  

Corporate protection for high profile executives 

Top executives in senior management positions in the company usually command whopping salaries. While regular companies will usually have traditional employer sponsored group benefit schemes or individual insurance policies, these may not always be sufficient. If attracting top management talent is a priority for the company, they should leave no stone unturned to keep their senior management prospects in a completely secure frame of mind. This may necessitate offering the key personnel additional business life insurance protection, so that they devote their mind, free of concern for self or family, to the expansion of the company’s commercial interests. 

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Using Life insurance as a bonus incentive -

The company may offer additional life insurance as an incentive to top performing management executives, for keeping them motivated and hardworking at the later stages of their careers. This can be done through different arrangements; for instance, the policy may be chosen by the executive based on their own preferred insurance company. The employing corporation may proceed to take care of the premiums, or pay an amount equal to the tax liabilities and so on. The executive will be able to use the policy’s cash value to supplement the savings that they have been accumulating for their retirement. They can use their experience to commit to the company’s growth even in advanced ages, since they will be assured that in the event of their death, the policy benefits will accrue to their family guaranteed by the employing company.

Collateral Coverage

For private business players, they may have concerns about existing debts that they had probably taken earlier to expand the business. For instance, if one wishes to apply for substantial loans from the bank in order to expand aggressively in new industries or be able to make new investments, it is standard practice to keep personal assets such as your home as a collateral with the bank. Of course, such risks are offset by the potential of growth that will be unlocked for the business with the injection of funds that will enable capital investments and increased production of engineering equipment, more marketing channels and so on. Nevertheless, there is always the risk that the economy may swing towards unfavorable situations. In this case, if the private businessman happens to pass away suddenly, there will be a heavy burden placed on his nominated successors of the business. The management will have to handle a crisis not just regarding the management of the business in its daily affairs, but it will have to also think afresh about how to pay off the collaterals in the case of underperforming business assets. Such a situation may be more challenging to face for an incumbent manager, who is perhaps not on the exact same wavelength as the original manager. Having a business life insurance handy, and notifying the successors to the private business, will go a long way in covering such collateral risks.   

Key Person Insurance for Business Owners -

How often have we seen the fortunes of a company, or a private business rise and fall according to the decisions made by one man, or based primarily on their mindset? This is mainly the case with businesses that have been built from scratch by an ambitious entrepreneur who is driven by their personal ambitions. The businessmen may be justifiably dubbed as the key person in the business. Key person insurance is a specific type of insurance that is designed to keep the company afloat at all costs, in case one of the company directors, or the key men meets with their death.

Business life insurance may be considered to be as vital for the fortunes of a company, as term or life insurance of the breadwinner may be considered to be indispensable for a family. There are some specific advantages which accrue if the company has arranged for insurance of the key man in the institution. Succession planning becomes simplified since the threat of a financial disruption becomes mitigated. In case the company needs to look for a personality of a similar stature who has the credentials to lead the company, they may need to arrange for substantial incentives and payouts to the new director. This can be managed out of the contingency fund of the key man insurance.  

Key man insurance may be defined as life insurance availed by the firm on the life of the concerned partner or director of the firm. The life insurance plan shall be owned in the name of the firm, the premiums are drawn on its account, instead of the bank account of the specific individual in concern. In the case of the UAE, major business insurance companies like Zurich International, MetLife, International Salama provide the option for this keyman insurance. They also provide other benefits like Critical Illness Benefit, Dismemberment payout and so on.

Finally, there is the unhappy possibility that the fortunes of the company crumble upon the death of the main personality. This may be due to incumbent factors such as a loss of leadership, or infighting among the successors on the board of directors. Nevertheless, it makes sense to protect the lower rung employees against such an economic collapse, and to have contingency arrangements for their payouts in case they have to be paid severance. 

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Buy-Sell Agreements 

A buy-sell agreement is a pre-existing arrangement about what happens to each owner’s respective shares if they decide to withdraw from the management of the company. These agreements control the circumstances of the ownership of the business, in case of a triggering event. While death is the most usual situation for these agreements to become applicable, there could be other causes too such as departure by choice, retirement etc. In case of the death of the original owner of the business, the business may fall into the hands of their spouse, their immediate family heir, or some other potential beneficiary. There is a potential problem if the legatee who inherits the business does not desire to get involved in the management of the company. Conversely, the senior management on the board may now find themselves dealing with a nominee who does not have the requisite competence or life experience to be involved in the company’s senior management. It makes sense to have a clearly worded buy sell agreement in place to protect against such management clashes emerging in the future. 

Business owners may use business life insurance to make the necessary arrangements. Some of the practical life insurance options are discussed as follows. A term insurance for owner departure is useful if there is the possibility of the owners retiring, or eventually selling off the business to a third party. On the other hand, if the owner holds no intention of relinquishing their control over the company, they may opt for a permanent life insurance policy for continued participation. A cross-purchase agreement comes in useful when there are, say, two owners of the business, and each of them owns a life insurance policy leveraged on the other owner. It shall be triggered in the event of the death of the other owner. Finally, there is the option of entity based arrangements. The concept here is that the business itself acts as an owner and beneficiary of the life insurance policies. In case one owner passes away, the business shall receive the death benefit, and the controlling shares of the deceased shall be distributed to the remaining owners.

Estate Management

In some businesses that are privately controlled by prestigious families, disputes may arise regarding the inheritance or future of the company’s management, upon the death of the main family head. These disputes may be due to unequal involvement of the various family members in the establishment as well as the growth of the family business. While it may be the case that only select individuals were responsible for the establishment, registration and expansion of the business, it is in the natural self-interest of other family members too, to stake a claim based on other emotive or familial factors. If such situations are not handled strictly with due legal process, they may lead to deterioration of the business as a whole, and infighting within the incumbents who seek to inherit the business or the estate. Hence, the family patriarch should have the foresight to make the necessary arrangements; this is a good example of the strategic use of life insurance. It may be used in order to provide inheritances to the family members who were perhaps not actively involved in the estate or business management directly, but nevertheless do not wish to be left out of the benefits.

How to Buy Life Insurance as a Business Owner?

While purchasing life insurance as a business owner, the buyer needs to take care of the following:

  • Make a list of the insurance needs for the individual, their family, and the business separately.
  • Diligently compare the available options between the aforementioned companies, and make a good selection based on the priorities that have been outlined in the earlier step.
  • Submit your application to the insurance company, along with the required documents.
  • Complete the medical exam if it is stipulated as necessary by the company.