Lack of universal life insurance policy for key personnel could jeopardize start-up projects

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Backers of start-ups and mega-projects could eliminate risk by insuring the start-up owner or project manager of mega-projects through a universal life insurance policy with a nominal premium that mitigates the risk of non-performance, inability to manage and death of the insured.

The success of most projects and megaprojects as well as start-ups depends to a large extent on leadership and its ability to effectively use funding to achieve timely results. Their inability to deliver could jeopardize the project, megaprojects or start-ups, and therefore could jeopardize investment and financing.

About 90% of startups fail, according to a study by Start-Up Genome, and 10% of startups fail within the first year. Across all industries, start-up failure rates seem to be close to the same. Failure is most common for second- through fifth-year startups, with 70% of them falling into this category.

There are over 650,000 active businesses in the UAE and over 90% of them are small businesses. The country is currently home to 5,174 start-ups in the UAE, according to Tracxn, a global provider of start-up financing solutions.

Startups raised more venture capital than ever in the past year and more cities around the world have started to look like tech hubs – although Silicon Valley remains firmly in the lead. In 2021, investors more than doubled the amount of cash they doled out to start-ups, reaching $621 billion worldwide and breaking the previous year’s record, according to new data from the research firm. CB Insights. The United States accounted for about half of the global total in funding, with start-ups in the country raising around $311 billion, according to the report.

Startups in the Middle East and North Africa (MENA) region raised $1.7 billion in funding in the first half of 2022. With a 90% failure rate, this could mean financial loss of $1.53 billion and exposes investors to the risk of losing their wealth due to several factors, including the failure of the startup founder.

Thus, start-up funding is extremely risky and many investors have lost money on start-up funding. The same goes for projects and megaprojects whose fate depends on the leadership of the project manager and his ability to deliver the project on time and according to the contract.

It is therefore crucial for funders, investors and project promoters to cover their risks by insuring these key people with a substantial sum so that funders or investors can recover their money in the event of death and disability.

However, while all is well, most people don’t realize the risk, until something goes wrong and financiers, investors and project owners start counting the losses. A universal life insurance policy could help save investors from such a disaster.

“It is undeniable that project leaders, banks, investors and other funders invest in individuals and their leadership. Megaprojects are suspended when the head of the organization dies while still active in the project,” said Leena Parwani, Founder and Managing Director of LPH Financial Services.

“How safe is his investment, especially in the advent of pious frauds which cannot be controlled, and the performance of the individual also which cannot be controlled, so that the key people also die. Universal life insurance covers major risks and liabilities to create a shield of security. Although there are many risk factors when an investor invests in someone or with someone.

“Such problems can be solved with insurance, we insure with fund houses the risks of investing in start-ups, SMEs or even megaprojects.”

LPH Financial Services recently tackled two cases in the United Arab Emirates – which could set the tone for such risk-based insurance products that help financiers and the investment community, especially when financing projects whose success depends on the leadership and performance of the project or team leader.

“We solved this problem for an investment fund house, where we insured an individual for $35 million in life cover. The fund’s initial investment was $10 million, while with a valuation gain, investors are promised to earn 5X in 7 years, keeping the hedge moderate, the investor placed the policy on the leader of the start-up for 3.5X in principle for the next 10 years. There is a clear insurable interest out there for investors,” Leena Parwani explains her recent experience which makes her an ideal case study.

“This is a unique solution and we have seen an increase in demand for this as it is now part of the risk management factor. We recently insured another Dubai-based businessman who was awarded a US$200 million joint venture project with a family business of the investor. The investor took out $50m life insurance on the Dubai-based businessman to cover the risk, arranged by us.

In this way, the investor is able to ensure liquidity and, in some cases, the total or partial recovery of his funds. This life cover is granted conditionally to the investor.

“Financiers and investors are now more aware of insuring founders, start-up partners and project directors of mega-projects to mitigate risk and this should become a trend now than later to protect the investment in the event of death,” she said. “We have created a campaign to raise awareness across the industry about the risks associated with unprotected and uninsured investments in start-ups and ventures.”

Leena Parwani, who started her financial services practice in 2013, has been one of the top financial advisors in the UAE for the past nine consecutive years, serving large corporations, entrepreneurs and business leaders .

His company LPH Financial Services offers financial advice on the protection of personal wealth, estate planning, estate planning against potential risks for individuals and businesses against various types of loss or damage.

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