Business protection explained: key person, shareholder protection and relevant life
Most limited company directors I speak to have personal life insurance. Fewer have thought through what happens to the business if they — or a business partner — dies or becomes seriously ill. This guide covers the three main tools.
Key person insurance
Pays a lump sum to the business if a key employee or director dies or becomes critically ill. The business uses the money to manage the financial impact — covering lost revenue, recruiting a replacement, repaying a director's loan, or simply giving the business time to adapt. The policy is owned by the company and the company pays the premiums. Tax treatment depends on purpose: pure income protection is usually deductible; capital protection less so — your accountant should confirm.
Shareholder protection
When a shareholder dies, their shares pass to their estate. This can leave the remaining shareholders in business with someone's widow, adult children, or — in the worst case — the executor of the estate, none of whom signed up to run a company. Shareholder protection policies fund the buyback. Each shareholder takes out life cover (and optionally critical illness) equal to the value of their shares. The proceeds are used to buy the shares at an agreed price.
Cross-option agreements
Shareholder protection works properly only alongside a cross-option agreement — a legal document that gives the surviving shareholders the option to buy the deceased's shares, and the estate the option to sell. This avoids a forced sale while ensuring both parties can proceed if they choose to. Without this document, the policy pays out but the shares might not be transferred. Always use a solicitor to draft this.
Relevant Life Plans
A Relevant Life Plan is life insurance for directors and employees, paid for by the company. Premiums are generally a corporation tax-deductible business expense. The payout is free of income tax and inheritance tax if written in trust. For a 40% taxpayer director, a Relevant Life Plan is typically 40–50% cheaper than an equivalent personal policy — for the same amount of cover.
How to review your position
Start with three questions: who would you miss most in the business? What would it cost if they weren't there for 12 months? And who owns shares — and what would happen to them? A short call answers all three and lets me recommend what (if anything) is worth putting in place.
Running a limited company and want to check your position?
Key person, shareholder protection, Relevant Life — I'll work through which matters for your situation.
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