Protection for your business investments

Life insurance policies can provide valuable protection for a business and a benefit for employees.

What arrangements are available?

The main types of arrangement are designed to protect the interest of shareholder directors of a close company, partners in a business partnership, key employees and a business loan.

Director shareholder schemes

Shareholder directors in a close limited company (ie 5 or less directors) have an interest in protecting their company from the shares coming in to the hands of potential competitors.

This can arise if a director shareholder dies and his/her shares are subsequently sold by the heir of his/her estate to a director of a competitive company.

To overcome this problem, director shareholders can set up a legally binding arrangement whereby the surviving shareholder directors have the first option to buy back the shares of the deceased shareholder director.

A life insurance policy can be set up to provide the funds to buy back the shares to prevent them falling in to the hands of a competitor. In this situation each director shareholder is deemed to have an insurable interest in the lives of the others.

A term life insurance policy is normally used with the sum insured reflecting the assessed value of each directors holding. Each shareholder takes out a separate policy for the benefit of all the other shareholder directors.

In the event of premature death the funds are provided to enable the remaining shareholders to buy back the shares, thereby protecting the interests of the remaining shareholders and the company from potential competitors acquiring the shares.

Partnership schemes

A similar situation arises with the partners of a business partnership. In this case it is the partners share of the business which is protected. As a result, a special partnership scheme can be established so that life insurance policies can provide the funds for the surviving partners to buy back the deceased partners share of the business.

Keyperson arrangements

A keyperson in a business is one who provides specialised knowledge or a contribution to the business which would be difficult to replace. If the keyperson were to die prematurely the business could suffer financial loss.
In this situation the business has an insurable interest in the keyperson and can take out a life insurance policy to protect it’s interests. Normally a term life insurance policy is used with the business as the legal owner and therefore entitled to the proceeds of a claim.

Employee arrangements

Although not directly protecting business assets, a life insurance policy is commonly used to provide a death in service benefit for selected employees.

The life insurance is taken out by the employer for the benefit of the employee. The sum insured is usually a multiple of his annual salary and the Inland Revenue allows up to 4 times salary as a maximum.

The arrangement can be set up as a single stand alone policy or where many employees are involved a group scheme is usually arranged. Level term life insurance is normally used. The benefit is not taxed as a benefit in kind to the employee but the company receives corporation tax relief on the premiums.