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Key Person and Shareholder Protection Cover – The Lowdown

Adam Grundy, Employee Benefits Account Executive at BHIB Writes….

“Have you ever asked yourself the following questions?

  • Are you adequately covered if a Director, Shareholder or Key Employee was diagnosed with a serious illness or sadly passed away?
  • What if your MD or top Sales person was out of action, what would the cost be to replace them?  Would it affect profitability of your business?  What key skills would you lose?
  • What continuity measures do you have in place to keep control of your business?  How would you feel if your Company fell into the wrong hands?

Businesses in the UK insure their material goods but all too often the most important assets are overlooked!  Yet there are 2 easy solutions, each providing a cash lump sum in the event of a business owner or key person passing away or suffering a severe illness.  They are designed to do 2 very different things; protect the profitability and continual running of the business or ensure ownership is protected.

Shareholder & Partner Protection – The lump sum is paid out to the business if a business owner dies or suffers a severe illness.  It provides the capital to enable the surviving business owners to purchase the deceased’s or incapacitated individual’s share of the business, allowing them to keep control of it.

Key Person Cover – This can be taken out by a business on the life of one of its employees or directors.  The cover is designed to protect the net pre-tax profits in the event of death or serious illness of one or more of the company’s key employees.  A key person is an employee with specialist knowledge that if they were to suddenly no longer be there would have a detrimental effect on the day to day running and profitability of the business.”

Here are 2 examples of business protection at work:  –

Shareholder Protection

Orange Software Ltd (OS) is a small online development company currently worth £1m. There are three shareholding directors, Steve with 60%, Mike with 30%, and Jane with 10%. OS recently put a succession plan in place in case any of the directors die unexpectedly. 

They have signed a cross option agreement and each director has a term assurance policy to retirement age for the value of their shareholding. The policies are under Trust for the other directors, with all three acting as Trustees. Unfortunately, Steve dies suddenly and the life office pays out the claim value of £600,000 to Mike and Jane as Trustees. They would split the money between themselves as surviving directors and beneficiaries and each use their money to buy Steve’s share from his estate. Steve’s estate then has £600,000 cash, for the value of his shares. The surviving shareholders continue with OS business, with no further obligations to Steve’s heirs.

Mike and Jane say they are so glad they took out BP when they did.

Disability Cover – Key Person

Mark Vaughn,  40 years old, Non-smoker, £36.75 per month premiums, 20 year term, £100,000 Life Cover and £100,000 Disability Cover.

Mark Co-owned a small travel firm with his business partner Kieran, but when Mark was diagnosed with severe cirrhosis of the liver, it was recommended that he leave work because of the impact the illness had on his lifestyle. Disability Cover for Business provided a lump sum payment to the business which was used for business loan repayments. Payments that would have been very difficult to cover with Mark no longer working.

To learn more about the above covers, along with other ways that BHIB Employee Benefits team can help you and your business, you can email Adam, or call him on (0116) 2819148.