Keyperson & Shareholder Difference

Notes on Company Wealth Protection Insurance Plans


Key Person

Key person assurance is used to address the fact that although many businesses fully insure their material assets, often the ‘human assets’ are overlooked. ACME LTD are fully aware of this, and require the three key individuals of the company to be insured for the specified amounts. Should the unfortunate happen the proceeds could be used for many things, among them replacement costs, such as headhunting fees, salary for a replacement person, business interruption costs as projects may be delayed or existing contracts/contacts lost, or other financial implications such as falling profits, or cancelled loan agreements (if appropriate). We recommend you review the level of cover provided regularly as the business continues to grow.

All costs will be borne by ACME LTD and the plans are written for a 5-year term. This should also ensure that should you wish them to, HMRC will allow the premiums as an allowable deduction for Corporation Tax purposes, however we also recommend you carefully consider the potential taxation of key person policies. I can confirm that once the plans are in force you should send a letter to send to your local HM Inspector of Taxes to obtain clarification. I can provide a specimen letter if required.

In summary, Key person policies are paid by the company, for the benefit of the company.


Shareholder

The death or critical illness of a shareholder can often halt a business in its tracks because of the need to rearrange the shareholding. Problems may arise if the family of a deceased shareholder do not agree with the way the others are running the business or if a shareholder who is critically ill is no longer able to contribute to the business but still wishes to have a say and reap financial rewards thus holding the company back. In order to mitigate these problems (and others) and to enable swift action to be taken I recommend that the shareholders protect their interests in the business. We discussed the implications of individual shareholders dying or being diagnosed with a critical illness.

If any of you were to die or be unable to work through critical illness the situation would be difficult. It was agreed that the other partners should have the funds available to purchase the shareholding. This way the shares would stay in the same hands and the other party would have funds to deal with the situation as they wish. So for example, if Person A were to die, funds would be available for Person B and Person C to purchase the shares, keeping the shares in the control of those still running the company and providing Person A’s family with money to use as they wish.

The shareholder cover was based on the value of ACME LTD at XX date. I recommend that you review this amount of cover as the business grows to ensure that the cover reflects the market value of the business. Although ACME LTD will pay the premiums they will be treated as a ‘P11d’ style benefit and taxed accordingly. You should ensure that your accountant is aware of this and deals with the premiums appropriately. As you may have differing premiums you may wish to ‘equalise’ the costs, thus ensuring equal taxable benefit for each of you.

In summary, Shareholder protection provides benefits for individuals or their families, in exchange for the value of shares

Please note this is just intended to be a very basic guide.
There is more information in my downloadable guide http://www.iangreen.com/downloads/Bus_si.pdf
but please do seek professional advice before arranging these types of contracts

Business Protection. What are the chances...?

Go to www.iangreen.com or Contact us
for a pdf of the guide

Please find following a few statistics sourced from recent research*

It is a numbers game after all, but what are the chances it will affect me or you...?

"My top sales consultant suffered a stroke. I lost our biggest client"
25% of businesses questioned had key employee protection
The unexpected critical illness or death of a key person can have a damaging and permanent impact on a business. Key person protection can provide funds to help minimise the impact and allow a business to recover should the worst happen

"My business partner died unexpectedly. I didn't have the funds to buy his interest"
50% of businesses questioned believed the death of a key employee would have a severe impact on their business
Remaining partners could lose control of the business in the event of the death or critical illness of a partner. A partnership protection plan can provide continuing partners the funds and the right to allow the interest to be purchased

"It'll never happen to me..."
60% of businesses questioned did not have, or did not know if they had, a financial safety net when considering protection of key employees, loans or control of their business.
In a business with 4 key male employees there is a 68% chance** that 1 will suffer a critical illness before they retire. The absence of an important employee can damage a business in a number of ways. In a moment it could lose key skills, experience and contacts.

"One of our shareholders died suddenly and his wife sold his shares to our biggest competitor"
73% of businesses questioned had no shareholder or partner protection
Remaining shareholders could lose control of their business in the event of the death or critical illness of a shareholder. A shareholder protection plan can provide continuing shareholders both the funds and the framework to purchase shares from the shareholder or their estate.

"I suffered a heart attack. As a sole trader, if that wasn't enough for me and my family to deal with, I was then unable to repay my business loan"
79% of businesses questioned had no corporate loan protection.
Whether a sole trader or a director the implications of being unable to repay business debt can have a damaging and permanent impact. Loan protection can provide a sum of money to ensure the repayment of business loans in the event of the death or critical illness of the person covered.

*Scottish Provident small business risk research January 2011 : interview of 208 small business decision makers
** Munich Re, 2007

Since 1999 Business Protection has formed an important part of corpoarte financial planning for Green Financial clients.



Too often the risks to businesses from the loss of key personel or shareholders are overlooked.


If you'd like me to provide a risk assessment of your business, where we 'look for the loss' I'd be delighted to help.


If we find no loss, then you don't need insurance. If we do find a situation where the unexpected absence of an individual, usually through death or illness, would cause loss for the business, the shareholders or their families then you may wish to consider insurance.



contact us at http://www.iangreen.com/ if you'd like a pdf of the guide (below)