FIN375Insurance Fundamentals and ConceptsBuy sell agreementis another use of insurance in a business setting.For example, 2 individuals could come together with their respective capital and know-how to set up a company that manufactures gadgets with each holding a 50% share. Thecompany prospers and grows over the past 10 years to an SME with 100 employees. Oneof the partners dies suddenly.Naturally, all assets of the deceased partner, including his 50% share of the company,will go to his immediate family members. If there is no buy sell agreement in place ora “business will” written prior, a few not so pleasant scenarios could happen that coulddisrupt the company.The family members who were once never involved may now choose to get involved inthe running of the company, being a 50% shareholder. Business decisions and executioncould now be disrupted with a new major shareholder on board. If the surviving partneroffers to buy over the 50% share of the deceased partner from the family, he may not havethe immediate cash and valuation of the company could also be a lengthy and contentiousissues.Even if the family of the deceased partner choose to not sell nor interfere in the businessoperations, the company’s operations would still take a hit for some time and when thecompany is back on track, the surviving partner would still have to share 50% of the profitswith the family even though it is now a one key person show and not two.Again the use of insurance with proper written agreement could solve this potentialproblem. For example, if each partner is insured appropriately, say $5m each based on hisor her estimation of his or her company value, the death of a partner would trigger off a$5m pay-out, given to the surviving partner with the sole intention of using it to purchasethe 50% share of the deceased partner. Both partners would also agree that each wouldhave the first right to purchase the shares with the insurance proceeds. Usually, a lawyerwould be involved to craft the buy sell agreement, and more importantly, the buy sellagreement needs to be funded by an insurance contract to provide the cash.In a way, a buy sell agreement looks like a business will with specific instructions.SU1-14
FIN375Insurance Fundamentals and Concepts1.2.3 Societal Use of InsuranceA nation or a government would also need to use insurance. If a nation is not insuredadequately, especially in the health care segment, the nation could find herself bearing thefinancial burden of taking care of her citizens when the perils of health care cost kick in.