Keyman insurance, shareholder protection, partnership protection - business protection by independent financial adviser John Bramwell

Business Protection

Introduction

Most businesses have comprehensive insurance cover for their premises and other assets such as equipment, office furniture and vehicles. However, the actual cost of some of these can be trivial in comparison to the devastating impact of the death or serious illness of a key person.

Shareholder and partnership protection

When a director of a company or partner in a firm dies, not only is there an immediate loss to the business of their expertise and income but there are also several issues to consider regarding future ownership of the business.

Shareholder or partnership agreements (linked to life insurance), between directors, shareholders and partners, that have been prepared beforehand, can eliminate these issues.

For example, a life insurance policy could be set up for a director of a company so that his or her shares in the company could be bought for the remaining co-directors using the proceeds from the policy. This would enable the deceased director's spouse to receive payment for the shares and the co-directors of the company to prevent control of their business passing into potentially unwelcome hands.

These agreements need careful setting up and wording to ensure that what is intended will actually happen and that appropriate life policies are set up in a tax-efficient manner.

Key person insurance

A key person is anyone whose death or disability would have a serious effect on the business's future profits.

Examples are sales directors with valuable contacts, controlling directors, key designers/researchers, and anyone offering personal guarantees to the business.

All businesses should consider the loss of profits if a key person were to die or become seriously ill. If the loss cannot be easily met from reserves then key person insurance can be used to provide a lump sum (or regular payments) to cover the loss.

The tax treatment of any benefits from key person insurance can vary, depending on how policies are set up. Advice should therefore be taken on the tax implications before applying for this kind of insurance.