Updated: February 26, 2020

Relevant Life Cover and Shareholder Protection

What's the difference between Relevant Life Insurance and Shareholder Protection? Read all the details here to find out

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Richard Angliss

Author: Richard Angliss - Finance Expert

Updated: February 26, 2020

Both relevant life cover and shareholder protection provide important insurance for small businesses who rely heavily upon the expertise of a finite group of employees in order to grow and achieve success.

This article looks at the key differences between relevant life cover and shareholder protection and the specific circumstances where these types of business insurance may be desirable.

What are the differences between relevant life cover and shareholder protection?

In a nutshell, the key difference between these types of insurance is as follows:

Relevant life cover is designed to provide financial provision for an employee’s beneficiaries in the event of their death. This is known as a ‘death in service benefit’ and shareholder protection offers a safeguard for the business owners if one of them were to die with no written agreement (or funding) in place.

Let’s look in a little more detail about how these insurances work and what benefits they provide:

What are the key benefits of relevant life cover and how does it work?

For any small business (typically with less than five employees) which doesn’t qualify for a group insurance scheme, relevant life cover can provide death-in-service benefits for the family or other nominated beneficiary of an employee if they were to die whilst under contract.

Relevant life insurance is bought and paid for by an employer, therefore it’s effectively free life cover for an employee. As the policy is kept within a discretionary trust, any lump-sum payments made to a beneficiary are usually free of any income or inheritance tax liabilities.

Other key benefits of relevant life cover for an employee include:

  • All lump sum benefits remain outside an individual’s lifetime pension allowance
  • Insurance premiums are not categorised as a benefit-in-kind

For an employer, relevant life cover is an attractive benefit to be able to offer potential employees and can help retain highly skilled existing members of staff whose contribution is crucial to the business’ performance.

It is also a tax-efficient form of insurance for limited companies as premiums are usually classed as tax-deductible for corporation tax purposes.

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What are the key benefits of shareholder protection and how does it work?

Whereas relevant life insurance very much focuses on protecting an employee’s family in the event of their death, what happens if one of the company owner’s were to die? More specifically, what happens to their share of the business?

Should this event occur, the deceased’s share of a business will typically pass to their beneficiaries.

If a company has no written agreement in place outlining what should happen in this eventuality and a beneficiary’s preference is to liquidate their inheritance, the remaining owner(s) must find the funds to be able to purchase these shares.

Shareholder protection insurance provides a business with a source of funding for the surviving shareholders to purchase the shares from a beneficiary with a sum assured is typically equal to the value of each owner’s share of the company.

Succession planning is a very important part of a business’s success (and one that many often overlook) – whether large or small. Shareholder protection can prove to be a valuable form of insurance enabling a firm to act upon the written agreement of all the company owners should one of them pass away unexpectedly.

At the very least, shareholder protection should prompt a business to ensure it has a written succession agreement in place and, importantly, the funding required to cover the cost of each owner’s shares.

If you’d like to know more about the key differences between relevant life cover and shareholder protection, make an enquiry and we will arrange for an advisor we work with to get in touch.

Can I use a relevant life policy for shareholder protection?

Due to the tax concessions made by HMRC, on the basis it is designed to provide financial assistance for an employee’s family in the event of their death, relevant life cover is not typically deemed appropriate for shareholders looking to insure each others equity within a business.

It is completely acceptable, however, for a business to have a relevant life policy in place for their employees, in addition to a separate shareholder protection insurance plan for the business owners.

Can I include critical illness cover in addition to either relevant life cover or shareholder protection?

Yes, this is possible. There are a number of providers for both these types of insurance who can offer additional cover should either an employee or a shareholder of the business become incapacitated due to a severe critical illness or serious injury.

Get in touch and we can arrange for an advisor we work with to help you identify which providers can offer this type of insurance.

How does keyman insurance differ?

Keyman insurance is designed to provide a business with financial support following the death of a key member of staff. The sum assured from this type of insurance could be used to recruit someone with similar skills and abilities or offset any potential fall in the business’ profits as a result of the employee’s death.

If you’d like to speak with an expert regarding keyman insurance make an enquiry and we will arrange for an advisor we work with to contact you.

Speak to a business insurance expert

It’s important to understand the key differences between all the various types of insurance so you’re better informed as to how you can protect the long-term future of your business. This is where we can help.

The advisors we work with can discuss the benefits of each type of business insurance in more detail. All advice is free and any information is always given in the strictest confidence. Call us on 0808 189 0463 or make an enquiry to get started.

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We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in relevant life cover. Ask us a question and we'll get the best expert to help.

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Richard Angliss

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.

FCA Disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms that are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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