Running a successful business involves planning for the unexpected. Two vital tools that business owners often overlook are Key Man Insurance and Shareholder Protection. Both are designed to protect the future of your business, yet they serve very different purposes
At Howard Wright, our team of Chartered Financial Planners have been advising businesses across the Midlands and the UK for decades.
In this blog, we’ll break down the key differences between these two types of cover, helping you decide which one best suits your needs.
What is Key Man Insurance?
Key Man Insurance, sometimes know as Key Person Insurance, is a life insurance policy taken out by a business on its most valuable team members. These are often individuals whose absence would severely impact the business day to day functions such as the CEO, lead engineer, or top salesperson.
How Does Key Man or Key Person Insurance Work?
- Policyholder: The business owns the policy and pays the premiums, which is very tax efficient as premiums can be offset against corporation tax.
- Coverage: If the insured “key person” dies or becomes critically ill, the business receives a lump sum payout.
- Purpose: The payout is designed to cover the financial loss to the business, such as the cost of recruiting and training a replacement, compensating for lost revenue, or repaying debts.
Example:
Imagine a tech startup relies heavily on its founder’s industry expertise and connections. If the founder were to pass away unexpectedly, the business could face financial hardship even ruin. A Key Man Insurance policy would provide the company with funds to stay afloat during this very challenging time.
What is Shareholder Protection?
Shareholder Protection is a type of insurance designed to ensure the smooth transfer of shares if a business owner or shareholder dies or becomes critically ill. Without such protection, disputes over ownership can arise, causing uncertainty and potential instability for the business.
How Does it Work?
- Policyholder: Each shareholder takes out a policy, or the business itself may own the policies.
- Coverage: If a shareholder dies or is critically ill, the policy pays out a lump sum to the remaining shareholders or the business.
- Purpose: The payout is used to purchase the shares from the deceased’s estate or critically ill shareholder, ensuring the business remains in the hands of those actively involved.
Example:
A manufacturing company has three equal shareholders. One passes away, leaving their shares to a family member with no interest or expertise in the business. Shareholder Protection ensures the surviving shareholders have the funds to buy out the shares, maintaining control and continuity. Think to yourself could you buy out your business partner today out of your own capital, in most cases this is usually not possible and often overlooked. This is why shareholder protection is so important when working in partnership with other shareholders.
Key Differences Between Key Man Insurance and Shareholder Protection
- Purpose:
- Key Man Insurance is about protecting the business from the financial loss caused by losing a key individual.
- Shareholder Protection is about ensuring a smooth transfer of shares in the event of a shareholder’s death or critical illness.
- Beneficiary:
- The business is the beneficiary in Key Man Insurance.
- The payout in Shareholder Protection is typically used by the surviving shareholders or the business to buy out shares.
- Focus:
- Key Man Insurance focuses on mitigating operational risks.
- Shareholder Protection focuses on securing ownership continuity.
- Policy Structure:
- Key Man Insurance is often a single policy covering one individual.
- Shareholder Protection involves multiple policies, one for each shareholder, or a cross-option agreement.
Why Your Business Might Need Both
While these two types of cover serve different purposes, they’re not mutually exclusive. Often, we recommend that our clients implement both into their business.
- Key Man Insurance ensures your business can weather the financial impact of losing a crucial team member.
- Shareholder Protection ensures that your business’s ownership remains stable and predictable.
By combining both policies, you can protect the operational and ownership aspects of your business.
How Our Team At Howard Wright Can Help You And Your Business
Understanding the complexities of Key Man Insurance and Shareholder Protection can be daunting. That’s where our expert team of chartered financial planners at Howard Wright can help. With decades of experience helping business owners and hundreds of clients across the UK, we are here to provide tailored advice that aligns with your business’s unique needs.
Our Award Winning Approach:
- Initial Consultation: We’ll take the time to understand your business, including its structure, key members, and long term goals.
- Risk Assessment: We’ll evaluate the financial risks your business faces and identify which policies will provide the best protection.
- Tailored Recommendations: Whether you need Key Man Insurance, Shareholder Protection, or both, we’ll help you find the most cost effective and comprehensive solution.
- Ongoing Support: As your business evolves, we’ll ensure your policies adapt to meet your changing needs.
Contact Us Today
Don’t leave your business’s future to chance. Contact our team of Chartered Financial Planners today to explore how Key Man Insurance and Shareholder Protection can protect your company’s operations and ownership from financial hardship should the worst happen.
Call us on 0345 688 4939 or complete our 20-second enquiry form below to get started. We look forward to hearing from you and seeing how we can help protect you and your business, to ensure long term financial security.
Protecting your business doesn’t have to be complicated. With the right guidance, you can make informed decisions that secure both your short-term needs and long-term goals. Let Howard Wright help you navigate this essential aspect of business planning.
Disclaimer: This blog is for informational purposes only and does not constitute financial advice. Policies and coverage options may vary depending on your business’s specific circumstances. We recommend consulting with a qualified financial advisor before making any decisions. Howard Wright Financial Planning accepts no liability for actions taken based on the information in this blog.