Updated: December 14, 2022
Shareholder Protection vs Key Person Insurance
Key Person Insurance or Shareholder Protection? Read on to find out which option is the most suitable for your business
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Both key person cover and shareholder protection insurance are designed to protect against the risk of financial loss for your business, but what exactly are the differences between them, would your business be better off if you took out both, and where can you find the best policies for your needs and circumstances?
We answer these questions and more in our guide.
Click a link below for more information about that topic, or read on for a comprehensive overview of both insurance types.
Is key person insurance the same as shareholder protection?
No; while they both work similarly, they are actually two different types of insurance product. A shareholder protection policy provides a payout to allow shareholders, partners or directors to purchase the shares of another shareholder. Key person insurance, on the other hand, pays out in the event that a key employee or director passes away.
If you’re unsure which one would be most relevant for your business circumstances, read on or make an enquiry. We’ll then put you in touch with one of the expert financial advisors we work with for a free, no-obligation chat about your insurance options.
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What are the main differences between them both?
The most notable difference between shareholder protection insurance and key person cover involves how the payout is distributed.
For shareholder protection insurance, funds can be distributed to other owners who wish to buy equity shares if one shareholder passes away (or if they are diagnosed with a critical illness that’s covered by the policy), but may not have enough funds to buy the shares outright themselves.
While losing a shareholder and navigating how their equity is distributed can be tough, losing an essential member of staff or a company director can also put a strain on a business, which is why key person insurance can be vital. Instead of the payout going to shareholders to purchase any equity, key person insurance pays out directly to the business to use it how they need.
See the sections below for more information about how these types of insurance work.
Key person cover is a type of life insurance which is purchased through a business to cover an employee or director who is responsible for contributing to your business’s net or gross profits. For example, a managing director, sales executive, marketing manager, or another person who brings a significant percentage of money into the business.
Each business will be reviewed individually by an insurance company to ensure that the policy is highly tailored to your business’ needs, and you can choose whether you want a cash lump-sum or regular payments to help with the running of the business, to replace staff members, or even close the company without having to declare bankruptcy.
There could also be a significant tax advantage to taking out key person insurance because the policy is purchased through a company, so you may be able to claim the premiums as an expense.
However, it’s always worth checking with a qualified financial advisor to see if this is viable for your circumstances. They can also recommend the best policies available to meet your needs and preferences.
If a shareholder passes away or is diagnosed with a critical illness that’s covered by the policy, shareholder protection can ensure that their shares are handled appropriately. Shareholder protection policies with more than two shareholders can be set up as either an own-life plan under business trust or a company-owned plan to buy back the shares of the deceased.
- Own-life under business trust: Each company stakeholder takes out stakeholder protection insurance on their own life, which is then written into trust for the business. The policy will then pay out into the trust and used to purchase the shares of the previous shareholder.
- Company share purchase: This is where the business takes out a policy on the lives of each shareholder. The insurance payout then goes to the business instead of trust so it can buy out the share then cancel it to increase the share percentage of each shareholder.
A carefully arranged shareholder protection policy could ensure that any policy benefits and premiums are not subject to inheritance tax.
If you’re not sure which one would be best for your business’ circumstances, get in touch. We can then match you with an advisor with experience in setting up shareholder protection insurance and can help you decide how you want it set up.
Should I take out both key person insurance and shareholder protection?
You can, though it entirely depends on your situation, the nature of your business, and budget. However, by taking out both of these policies, you’ll be ensuring that your company has a safety net for whatever happens. For more information on how to take these policies out, speak with a broker. They will be able to find you the most competitive quotes for both insurance types.
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How can I find the best policies?
Whether you’re looking to take out an individual insurance policy or want a combination, the best way to ensure that you get the best policy possible is to compare. However, while there are plenty of comparison sites out there, many of the companies listed are promoted, so you’re not getting a true representation of the entire insurance market.
It can also take a while to research and find products – not to mention the extra time it can take to go through the terms and conditions.
The best way to compare policies is by working with a broker. Not only could they save you time and money by finding the right products for your business, but they can also go through the terms and conditions on your behalf with their trained eye so nothing is missed out.
Speak to an insurance expert today
A qualified insurance expert can help you work out which type of insurance is right for you, then find the best deals on the market thanks to their whole-of-market access. Not only does this allow them to find highly tailored products that may not even be available to the general public, they can also walk through the policy to ensure that it meets your expectations.
Make an enquiry or call 0808 189 0463 and we’ll match you with one of the advisors we work with for a free, no-obligation chat about your business insurance options.
Ask a quick question
We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in key person insurance. Ask us a question and we'll get the best expert to help.
Richard Angliss
Finance Expert
About the author
Richard Angliss has made a career in financial services which stretches over 40 years.
His early career was spent learning about the various financial products and applying them to prudent advice, working for one of the largest life assurance and investment firms. After that he joined the financial services arm of a very well-known firm providing independent advice to their 8 million customers.
For the last 20 years he has been involved in building software solutions that help Advisers and clients work together to achieve good financial outcomes and helping to set up three independent advisory firms. He also has written many articles for financial services publications and provided commentary for newspaper journalists.
At an early stage in his career he realised the great satisfaction that comes with being able to help people achieve their goals and protect their families. “Regulation of financial services has hugely impacted on ensuring people get appropriate advice. The issue these days is access to that advice and just as importantly regular reviews to make sure that everything stays on track”.
With the growing development of online resources such as Online Money Advisor he sees a great future for people to access advice to make their pension and investment work harder for them. Plus, of course, to ensure they have insurance products in place that will be required when unforeseen events happen.
He knows getting that balance right is crucial to prudent financial planning and the wellbeing of individuals and their families.
