Case study

Background

Applicant details: The Colour Company Ltd, owned by Mr Baillie and Mr Knight, who are equal shareholders

Life assured for shareholder protection: Mr Baillie, age 38, Mr Knight, age 42

Occupation: managing director/finance director

Description of occupational duties and skills:
general management of the company, involved in day-to-day decision-making - equally responsible for strategy development

Life assured for key person protection: Mr Castle, age 46

Salary: £60,000 (+ bonus)

Occupation: sales manager

Description of occupational duties and skills: manages relationships with external suppliers and has a range of contacts in this field. Has specialist knowledge and over 25 years' experience in the printing industry

Company details: Established 1997, 30 employees

	December 2005	December 2004	December 2003
Turnover	£2,481,248	£2,291,626	£1,845,284
Gross profit	£1,583,462	£1,076,541	£788,421
Net profit	£669,223	£554,521	£367,512

Additional information: The company accountant has advised that the value of the company, based on financial accounts, is six times the net profits (£600,000), which is £3 million. Mr Baillie has £220,000 of personal life cover in place. Requirements have been discussed with the company accountant and the bank, a share agreement has been drawn up and all shareholders will be taking out cover.

Currently both director's shares and voting rights would pass to their estates if they died. However, neither Mr Baillie's nor Mr Knight's families have the necessary knowledge or experience in the industry to contribute effectively to the future growth of the business. Their exit strategy is to both retire at the age of 65.

Mr Castle's knowledge and relationship with industry contacts makes him vital to the business.

Benefit type	Life to be assured	Benefit amount	Term
Life cover	Mr Baillie	£1,500,000	To age 65
Life cover	Mr Knight	£1,500,000	To age 65
Key person income protection	Mr Castle	£50,000 a year	10-year term, deferred period of 13 weeks, two-year claim period
Life protection with critical illness	Mr Castle	£300,000 (5 x salary)	Five-year term with renewal option

Rationale for recommendation

Mr Baillie and Mr Knight established the Colour Company Ltd together in 1997 as equal shareholders. Since then the company has grown steadily and their business continues to grow. As part of their future plans, they considered what contingency they had in place if the worst should happen.

Both shareholders therefore agree to take out share protection life cover written under a business protection trust to cover the value of their shareholding, with a double option agreement also being put in place. It's important that the cover is reviewed regularly to ensure that the sum assured reflects the true value of the company.

This gives the deceased partner's estate the option to sell his share and the surviving partner the option to buy that share. If either side want to exercise their option, the other must comply.

Key person income protection has been recommended for Mr Castle as the business would continue to trade if they were to lose him as an employee. The sum assured reflects his contribution to profits and the recruitment costs involved to replace him.

Life with critical illness has been recommended with a multiple of five times' Mr Castle's salary - he is genuinely key to the business and this sum shows his worth to the Colour Company Ltd.

Premium and commission information*

Life to be assured	Total premium	Total commission
Mr Baillie	£181.50 a month	£3167.34
Mrs Knight	£223.50 a month	£3900.28
Mr Castle	£296.34	£3648.41

*Source - AEGON Scottish Equitable, 23 February 2007.