What’s The Difference Between Keyman Insurance & Shareholder Protection?

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This guide explains the difference between Keyman Insurance and Shareholder Protection Insurance to give you an idea of which is right for your business.

At first, they appear similar. After all, both are types of business protection.

They also both pay out if an important person in your company dies (or becomes critically ill, if you add Critical Illness Cover to your policy). This makes it tricky to know which one you need.

However, Keyman Insurance and Shareholder Protection are not the same. It’s therefore important to understand the difference between them as they achieve different things within your business.

Which you need therefore depends on the end goal and exactly what you’re looking to protect.

What Is Keyman Insurance?

The company takes it out on any key person / key people in the business who are crucial to the company’s success. This could be key salespeople, management figures or anyone else the company can’t do without.

  • It pays out if one of those key members of staff dies (or becomes critically ill, if you add Critical Illness Insurance to your policy).
  • Your company uses the payout however is necessary to reduce the impact on the business from the loss of a key person.

Common uses include offering a buffer against loss of profits; covering recruitment / training costs for a replacement key person; easing difficulties raising finance for new ventures; or even winding down the company in an orderly fashion.

Here’s why fintech Bikmo, a specialist online insurer of high-end cycling gear, needed Keyman Insurance for CEO David and CTO Jorg.

What Is Shareholder Protection Insurance?

Shareholder Protection pays out if someone in the business dies (or becomes critically ill, if you add Critical Illness Cover). However, it covers shareholders specifically rather than any key person.

  • The payout goes to the business / the remaining shareholders so they can afford to buy back the deceased / ill shareholder’s shares.
  • This lets the remaining shareholders keep control of the business and stops the company losing control of the absent shareholder’s shares.
  • Buying back shares also provides vital funds to the family of a deceased shareholder (or to a critically ill shareholder if you’ve added Critical Illness Cover to the policy).

There are three ways to take it out Shareholder Protection: Life of another; company share purchase; or own life under business trust. This impacts whether the business or the shareholders pay for it and how HMRC taxes it.

Dr Gavin Jordan and business partner Michael Greenland run Interface NRM, they set-up shareholder insurance so both the company and their families would be financially secure if the worst happened.

Keyman Insurance vs Shareholder Protection Insurance

To give you a better idea of the differences between Shareholder Protection and Keyman Insurance, we’ve put together a table of key comparison points.

Keyman Insurance

Shareholder Protection

What Does It Cover?

Compensates for any financial losses to the business due to the absence of a key person.

Pays out the value of an absent shareholder’s shares so the business can buy them back.

Who Needs It?

Any company with key people where the business would notably suffer if they died / became critically ill.

Companies with 2+ shareholders who don’t want to lose control of the business if a shareholder dies / becomes critically ill.

Who Pays?

The company pays the premiums for the key people.

Either the individual shareholders or the company depending on how you set it up.

Do I Need a Trust?

No, you don’t usually write Keyman Insurance into trust. Doing so could actually delay the payout when you need it the most.

Depends on how you arrange it. A trust is an essential part of own life under business trust Shareholder Protection Insurance.

How Are They Both Taxed?

Where the policies are covering different needs the tax position is different and is dependant upon how they are set-up.

Taxation of Keyman Insurance

How keyman insurance policies are taxed are primarily dependant on who is covered by the policy and whether they have any interest in the business.

Covering Shareholders

Where the a policy benefits anyone other than the business, premiums are rarely a tax-deductible business expense. HMRC also usually considers premiums a taxable trading receipt

Covering Employees

Premiums are typically a tax-deductible business expense as HMRC generally regards such policies as for the benefit of the business. However, the benefit will be a trading receipt subject to tax.

Covering Business Loans

Here the policy is for the benefit of a lender, not the business. Premiums are therefore not usually tax deductible. However, as the payout is to rebalance the company’s capital account, HMRC won’t typically tax it as a trading receipt.

Taxation of Shareholder Protection

There are various ways shareholder protection can be structured, the taxation of the policy depends on who owns the policy and pays the premiums.

Life of Another

Each shareholder pays for a policy on the life of the other shareholders. They pay using post-tax income, so there’s no tax relief. The shareholders receive the payout and so there’s typically no tax on it for the company.

Own Life Under Business Trust

Each shareholder buys cover on their own life in trust for the other shareholders. Most of the time the company pays, with premiums typically a business expense. However, shareholders pay tax on premiums as they’re a benefit in kind.

Company Share Purchase

The company buys a policy on the life of each shareholder and gets the payout, using it to buy back and cancel the absent shareholder’s shares. The proportionate shareholding and the value of the remaining shareholders’ stakes therefore rises.

Premiums are not typically a business expense as the policy benefits shareholders, who gain financially from a payout.

Tax treatment is dependent on individual circumstances and subject to change. The above is our understanding of current tax rules. Drewberry does not offer tax advice. Consult your accountant / solicitor for help.

Compare Business Protection Quotes & Get Expert Advice

Whatever your needs are as a company, we have a team of business protection experts who are on hand to help.

We compare Keyman Insurance quotes and Shareholder Protection Insurance quotes from every major UK insurer to find you the best deal.

Why Speak to Us?

We started Drewberry™ because we were tired of being treated like a number.

We know that our clients give so much to their businesses. They therefore deserve first class service when it comes protecting that business and their interest in it. Here are just a few reasons why it makes sense to talk to us:

For help and fee-free advice on which business protection is best to cover your business, don’t hesitate to get in touch. You can pop us a call on 02084327333 or drop us an email at help@drewberry.co.uk.

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