5th February 2014

Key person insurance and shareholder protection: Ensuring the show can go on

Key person insurance and shareholder protection: Ensuring the show can go on

Most business owners are very aware of the need to insure their business vehicles, premises, machinery, office equipment, etc. as well as having employer, public and product liability, but surprisingly many businesses haven’t insured what can arguably be their most important business asset – their star performers!

So please welcome on centre stage ‘Business Assurance’ – ‘safety net’ insurances that fall into two distinct acts.

Act 1 - Key Person Insurance

Within most businesses, there is usually at least one person who is crucial to the businesses success.

This could be anyone from the Managing or Sales Director, to a technical person or designer. It is always someone that ensures the business remains operational and in profit. if the death or serious illness of such key individuals would cause the business to face some serious challenges (including a loss of profits, repayment of business loans, business restructuring, or brining in someone with the right skills and knowledge to keep the business operating) then this person needs to be protected. Loss of this person may require a significant cash injection and going to a bank for support is not only expensive but usually impractical and ultimately fruitless.

Key Person Insurance is arranged by the business on the life of a key person and will provide an injection of funds into the business should this person be unable to continue in their duties. Key Person Insurance ensures that a business is never too reliant on one to the detriment of the company as a whole.

Click here to use our calculator to gain an indicative quote and see how Aston Lark can help protect your business.

Act 2 – Shareholder Protection

Shareholding directors with a considerable financial stake in the business have another challenge. How can they ensure that if the worst happens such as a serious illness or even death, that the business they've worked so hard to build benefits their families whilst still allowing the surviving shareholding directors to keep control of the business?

Share protection insurance again uses insurance policies taken out by the shareholding directors to provide funds on death or a critical illness. But instead of being paid to the business, the funds go to the surviving shareholders so that they have the funds to buy back the shares from the family. But what happens if the family doesn't want to release the shares and tries to ‘force’ their way into the business against the wishes of the surviving shareholders, or if the surviving shareholders won’t release the funds to buy back the shares from the family? The answer is that the insurance is only part of the arrangement.

There also has to be a shareholders agreement in place that gives each side the right to exercise their option and force the ‘trade’, ensuring that the right money ends up in the right hands at the right time! For this reason, clients will nearly always need the help of their lawyers to draw up the agreement, and their accountants to value the shares.

With these covers in place, whatever might happen... the show will go on!