Key person insurance | Is it what you need?

Over the years I have spoken to many clients who initially thought they needed key person insurance but, in the end, realised that they needed a shareholder protection policy.

Let’s look at both policy types and see which is the best for each purpose.

Key person insurance

A key person policy, also known as a key man policy in the past, is a life insurance policy taken out on the life of a key member of the team. This could be a top salesman, company director, manager, or anyone else who wouldn’t be easily replaceable.

In the event of their death, the policy pays the company a lump sum of money tax-free. The business then uses this money to smooth out any loss of earnings until this key person can be replaced.

They are excellent policies that can make a massive difference to a business at a difficult time.

The business pays the premiums, and the life assured pays no benefit in kind tax. Corporation tax relief can’t be claimed, but the benefit, if paid out, is tax-free.

Shareholder protection policy

Often confused with key person insurance, shareholder protection is a life policy taken out on the lives of shareholders in a company. In the event of the death of an insured shareholder, the policy pays a tax-free lump sum to the surviving shareholders.

A pre-agreed cross-option agreement is in place, which triggers the sale of the deceased shareholder’s shares back to the surviving shareholders, who in turn uses the life insurance money they have received to pay for the shares.

The result is that the surviving shareholder or shareholders take complete control of the company, and the deceased shareholder’s family is paid fair value for the shares.

The business pays the premiums, and the benefit in kind tax is due on the value of the premiums for each member.

Can key person be used as shareholder protection?

Technically, yes. Both are life insurance contracts, and the premiums will be identical on a like-for-like basis. However, the cross-option agreement is what binds a shareholder protection policy together. Without this, the surviving shareholder would be under no obligation to use the money to buy the shares, which could cause a problem for the deceased shareholder’s family.

Also, there might be a dispute about what the fair value of the shares is, with the family of the deceased thinking they are worth more than they are, which could potentially cause problems for the surviving shareholders.

As premiums are the same for both, it’s always better to apply for the correct policy and ensure the best cover possible.

Summary

If you are wondering which policy is right for you, contact our team. We work with many other businesses facing the same challenges as you and are best placed to help.

We can quote you in as little as 60 seconds. We know time is limited, so we won’t give you the big pitch either. We’ll just answer your questions and let you know what to do next.