Your people are more important than your clients. And yes, you did read that right. As Richard Branson said “Clients do not come first. Employees come first. If you take care of your employees, they’ll take care of your clients.”
We can help you source comprehensive Shareholder Protection Insurance and Key Person Insurance for the right price.
That’s also true for your directors; without certain key people, your business might flounder, stall or fail completely.
If you’re looking to protect the directors or anyone else who’s important to the success of your business, you might have already considered taking out additional insurance for key people. Maybe you’ve researched Key Person Insurance or Shareholder Insurance but you’re still not really sure what the difference is or which one you need.
In this article, we’ll explain (minus the jargon) the differences between Key Person Insurance and Shareholder Protection. We’ll also look at the different types of Key Person Insurance cover in more detail to make sure you’re not just ticking a box.
Key takeaways
- Key Person Insurance and Shareholder Protection both help protect a business when an important person dies or becomes seriously ill, but they serve different purposes.
- Key Person Insurance provides financial protection for the company. The business owns the policy and receives the payout to help manage lost revenue, recruitment costs, debt or operational disruption.
- Shareholder Protection provides ownership protection. It can give the remaining shareholders funds to purchase the shares of a deceased or critically ill shareholder.
- Key Person Insurance can cover directors, senior employees or anyone whose absence would materially affect profitability, customer relationships or business continuity.
- Shareholder Protection can help prevent shares passing to family members, competitors or other parties who may not wish to be involved in the business.
- Key Person cover may be arranged on a life-only or life and critical illness basis. Businesses should consider whether life-only protection leaves a significant gap.
- Policies and sums insured should be reviewed as the business grows, key roles change or share values increase, as outdated cover can leave the company underinsured.
So, what is Key Person Insurance?
Key Person Insurance is a life insurance policy your company takes out on anyone who contributes to the profitability of your business. It means you get financial support if an important member of staff dies, or suffers a terminal illness, critical illness or permanent disability.
In short, it keeps your business ticking over with an injection of cash.
What is Shareholder Protection?
Shareholder Protection is like a will for your business. It means you and your shareholders can buy out a fellow partner or shareholder if they die or become seriously ill.
In short, it stops company shares falling into the wrong hands.
Key Person Cover VS Shareholder Protection
Key Person Insurance and Shareholder Protection both protect the future of your business in case something terrible happens. But each has a different purpose and outcome. We like to think of Key Person Cover as financial protection for the business and Shareholder Protection as ownership protection.
| Area of cover | Key Person Insurance | Shareholder Protection |
|---|---|---|
| Main purpose | Protects the business against the financial impact of losing a key individual through death or serious illness. | Helps the remaining shareholders buy the shares of a shareholder who dies or becomes critically ill. |
| Who is protected? | The company itself. | The shareholders and the continuity of business ownership. |
| Who owns the policy? | Usually the business. | Commonly the individual shareholders or a trust arrangement, depending on how the cover is structured. |
| Who receives the payout? | The business receives the policy proceeds. | The payout is used to fund the purchase of the affected shareholder’s shares. |
| Who can be covered? | Directors, founders, senior employees, technical specialists or anyone whose loss could materially affect the business. | Shareholders whose death or critical illness could create an ownership or succession issue. |
| What can the payout be used for? | Lost profits, recruitment costs, debt repayment, customer retention, replacing expertise and maintaining cash flow. | Purchasing the affected shareholder’s shares under an agreed share purchase arrangement. |
| Business ownership impact | Does not directly determine who owns the deceased or critically ill person’s shares. | Helps prevent shares passing to family members, competitors or other parties who may not want an active role in the business. |
| Typical example | A sales director dies and the business loses revenue while recruiting and training a replacement. | A shareholder dies and the remaining owners use the policy payout to buy their shares from the estate. |
| Critical illness cover | Can be arranged on a life-only or life and critical illness basis. | Can also include critical illness, allowing a shareholder’s shares to be purchased if they can no longer remain involved in the business. |
| How the cover is calculated | Usually based on the individual’s contribution to profits, replacement costs, debts or other financial exposures. | Usually based on the current value of the shareholder’s stake in the business. |
| Supporting agreements | Usually does not require a share purchase agreement. | Should normally be supported by an appropriate shareholder or cross-option agreement. |
| Do businesses need both? | Potentially. Key Person Insurance protects the company’s finances, while Shareholder Protection addresses ownership and succession. | Potentially. Shareholder Protection addresses ownership, but it may not cover the wider financial impact of losing a key person. |
How Shareholder Protection protects the future of your business
Shareholder Protection is a policy on the life of a shareholder, and pays out for the benefit of the other shareholders. So if you’re worried about shares being gifted or sold to a competitor, or to someone who doesn’t have your business’s best interests at heart (an unwilling husband or wife for example), you might want to consider Shareholder Protection.
Ideally it’s a policy that’s taken out by all shareholders and provides remaining shareholders with the funds to buy out the deceased or ill shareholder.
How Key Person Insurance protects the future of your business
If you have staff members that are critical to your business (i.e. the business or customer trust would be seriously affected without them in it), you might want to consider Key Person Insurance cover.
It’s not the same as Life Assurance or Death in Service insurance, because the payout isn’t for the key person or their family. It’s a policy that’s owned by the business and pays out to the business.
Everything you need to know about Key Person Insurance
In our experience, businesses sometimes take out Key Person Insurance to tick a box (we get it; insurance is tedious and you have a lot of other stuff to think about).
So here’s everything you need to know about Key Person Cover (plus some insider tips) to help you work out which best suits your business.
How to make sure you’re not just ticking a box
There are two main types of Key Person Cover:
- Life only
- Life and Critical Illness
Lots of businesses opt for life-only cover as a way of saving money. But here’s the thing. You are FAR more likely to need to make a claim on critical illness cover. In fact, someone under the age of 65 is more likely to suffer a heart attack than die. And nearly 1 in 2 people born in the UK in 1961 will be diagnosed with some form of cancer during their lifetime (Cancer Research UK).
“Someone under the age of 65 is more likely to suffer a heart attack than die.”
Insider Tips for Key Person Cover
Insider Tip 1 – Get a payout for death following critical illness
If you have Life and Critical Illness cover and you make a claim for critical illness, the policy will normally end after a claim. But, most people don’t realise you can also add cover which pays out another lump sum in the event of death, even after a claim for critical illness has been made.
Insider Tip 2 – Think about your ‘future’ leaders
The younger you are, the cheaper and easier it is to get key person cover.
Younger people are more likely to get key person terms without the need for medical information and underwriting. And might expect to pay around £32 per month for cover.
Whereas Key Person Cover for someone in their 50s might take longer to underwrite depending on sums assured (because of the need for a medical) and could cost around £85 per month.
| Key Person Cover – Life and Critical Illness | Example monthly cost* (non-smoker) |
| 30 years old | £32.69 |
| 40 years old | £49.30 |
| 50 years old | £85.18 |
*male or female
Once cover is taken out, the terms and price will stand all the way through even if health deteriorates. So it’s worth getting in early and insuring future leaders, to lock in a cheaper price. Especially if you run a family business and plan to hand over the reins to your children one day.
Insider Tip 3 – Make sure you’re not underinsured
Underinsurance is only something you become aware of when you make a claim and realise you’re underinsured. But, with so many businesses trying to find ways to save money, underinsurance is worryingly common.
Maybe you took out Key Person Insurance in a hurry because your Investor insisted on it for all senior members of staff. It’s worth double checking that it’s not out of date and that it covers you for what you thought.
Or maybe on reading this, you’ve realised you have Shareholder Protection instead of Key Person Cover (or vice versa).
Want to chat it through and make sure you have the right insurance? We’ll ask you the right questions and tell you what you need (even if you don’t choose us).
Call 0118 923 5090 to speak to Simon.
Or ask about our FREE underinsurance check
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