Companies require specialist financial advice because of their importance to their staff and because of the corporate and tax laws which affect them.

Life cover for key people.
Who is a key person?

Every business has key employees on whom the profits depend. It may be the directors, the top salesman, the manager, the technicians - the people most difficult and costly to find and replace. The key employees in a business are usually not difficult to identify and it makes sound commercial sense for the company to insure these people in the same way it insures its premises and stock against fire and the resulting loss of profits. Indeed the company’s material assets are likely to prove much easier to replace than its human assets.

The unexpected death of a key person leaving work unfinished on his or her desk, perhaps with orders in mid negotiation, might have a shattering effect on a company where there are insufficient reserves available to meet the crisis. As well as loss of profits, the credit standing of the company may be jeopardised, for
example, where the key person is a director and there are personal bank guarantees and/or directors’ loan accounts which have to be repaid upon death.

What can key person insurance do?

Insurance on the life of a key person cannot replace the unique talents of the individual but it will safeguard the continuity of the business for the survivors.

The assurance proceeds, in the form of a cash lump sum, will help the company through the immediate crisis until arrangements can be made for the replacement of the key persons (or in extreme cases, allow time for the company to be sold as a going concern). According to circumstances this protection can be used by the company to:

• cover the fall in profits due to lost orders,
• repay bank loans, directors loan accounts or trade creditors,
• pay the salary of a temporary manager and
• cover the cost of recruitment and training a replacement.

Share Protection Life Assurance

In a private limited company most of the shares are usually held by directors and senior staff who contribute their skills as well as capital to the company. Indeed, the success of the company and therefore the value of the shares arise out of their collective efforts.

A company is a corporate entity distinct from its members which does not dissolve automatically on the retirement or death of a shareholder/director. The shares continue to be owned by the ex-director or by the beneficiaries of his estate until a purchaser can be found. It may prove very difficult to find a purchaser from outside the company willing to pay a fair price, especially if the block of shares does not represent a majority holding.

The other directors may view with alarm the prospect of outsiders coming onto the board and members of the ex-directors family might also be unwelcome. A practical solution is often for all the directors to enter into a ‘Double Option Agreement’ whereby it is agreed in advance that the continuing directors will have the option to buy the deceased’s shares.

For example, Mr X holds 60% and Mr Y 40% of the shares in X and Y Ltd.

If X dies, his widow (who has no wish to run the business herself), wants to sell the shares. Y wishes to buy them if he can raise the money.

On the other hand, if Y dies his widow will inherit a minority holding which she will find difficult to sell unless there is an agreement for X to buy the shares.

In both cases the urgent need is for cash to replace the lost income of the deceased director. Such cash can be provided for through a suitable life assurance plan tailored to your specific needs.

If you require more information, contact us on 01276 488030 or fill in our Request Form.