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What is Ownership Protection

(a subset of Keyman Insurance)

And why all businesses should consider it

Page Summary:

Keyman insurance and in turn Ownership Protection falls under the umbrella of Business Protection Insurance.

Find out on this page what it is and how it works, as well as its advantages and disadvantages.

What is Ownership Protection insurance

Important explanation

Keyman insurance falls under the main insurance umbrella of Business Protection insurance and there are 3 different policies available -

  1. Ownership Protection which is discussed on this page
  2. Profit Protection, and
  3. Loan protection

You also might like to read The introduction to Keyman Insurance page

Ownership protection pays out a cash sum if a Partner or Director (with a shareholding) dies or suffers from a critical illness. If the policy pays out the money can be used by the remaining Partners/Directors to buy his shares.

Note that this type of insurance can go under many names including -

  • Director protection insurance
  • Partnership protection, and
  • Shareholder protection

If an ownership protection policy pays out the money has to be used for a distinct purpose - buying out the deceased Director's/Partner's shareholding. And so it's therefore a far more restrictive policy than Profit Protection where theoretically the cash lump sum can be used for any purpose.

The type of Keyman the policy is designed for
As its name suggests the owners, the shareholders (or Partners) of the firm. But of course the premium needed to cover the different owners will vary due to age and shareholding. This is discussed in more detail below.
How much cover is needed

Insure for all or part of the value of a Partner's or Director's shareholding which of course can fluctuate over time. Therefore, it's wise to evaluate the amount of cover needed on at least a yearly basis.

Who pays the premiums and are they tax deductible

The Partners and Directors do.

The company can pay on their behalf but this will usually be classed as a benefit in kind and the director/partner will then have a personal tax obligation.

The premiums will normally depend on a few factors -

  • The age of the Directors with share holdings
  • Possibly their medical conditions if the sum insured is large, and
  • The percentage of shares the Partner/Director owns

And as the directors will normally always be of different ages plus have different shareholdings a premium calculation equation can be used. This means that each Director's premium will vary.

Tax situation

The premiums in most cases don't attract tax-relief and if the policy pays out this is usually tax-free.

Why use this type of insurance

One of the main areas to consider for Partnerships and company directors with large shareholdings should they pass away is -

a) Who will their shares be left to, and
b) What in turn might this shareholder do

For example

  • The Managing Director who owns 20% of the company suddenly dies in a car crash
  • His shares are left to his wife who has no business experience
  • It's always possible with a 20% shareholding she could be a nuisance especially if sitting on the board
  • Or she could sell the 20% to somebody or a company that the other Directors view as potentially hostile

Ownership Protection insures all parties get a fair deal

If a Director or Partner suddenly passes away or suffers a critical illness all sides can get a fair deal when the policy pays out -

  • The company or partnership continues without any potential outside influence, and
  • The deceased director's estate gets a fair price for his shares or partnership holding.
Advantages to Ownership Protection insurance
  • It's sensible future planning - A well run and successful company is as much about preparing for the future as it is running the everyday operations

  • Protects your family if you've given personal guarantees - Even if your shareholding is worth a considerable amount of money that doesn't mean the company won't suffer cash flow problems if a key person dies or suffers a critical illness. The company's bankers could for example call in their loans hence causing a major cash flow problem which in turn massively reduces the value of any stake left to your family

  • Peace of mind for the company's bankers and backers - It's only common sense to reassure your banks and bankers that in the event of the death of a Keyman the company will have the problem covered

  • Cost - Many view Keyman insurance as money well spent, not because of its actual cost, rather the real cost to the company if a Keyman dies and in turn the turmoil that might cause
Disadvantages
  • Often bundled with a corporate loan - Watch out for this as some banks will try to add on protection insurance with any loan or credit they grant. The better strategy is to shop around and buy this insurance independently

  • Thought is needed to get the right policy - Each business is different, each has different aims, obligations and of course different key people. For this reason a business protection plan is not so hard to setup but a lot of thought has to go into what cover is needed, who needs to be covered and in turn to what degree. For example, a CEO who is the driving force behind the company will probably need more cover than the Finance Director

  • Specialised insurance - Business protection insurance is obviously not as popular as car or home insurance. It's far more specialised and so it can take time to set up and organise the right policy
Do you need Ownership Protection insurance
A good way to determine if you or your business needs a Keyman insurance policy is by asking the following questions -
  • Do you have at least 1 key person in your firm?

  • If a key member of your company dies or suffers from a critical illness and is out of action for a long period of time would the business still be operating in 12 months?

  • And if still in operation after 12 months would the profits be serious affected?

  • If your fellow executives or partners have a substantial shareholding in the firm, who would these shares be transferred to in the case of their death? If it's a child or spouse that might cause the business problems especially as they would be unlikely to have commercial experience.

  • Is your company's debt and loan obligations insured? And if not what would happen if a key person, especially a major profit generator, dies or suffers from a critical illness?

  • Is there a risk of any personal guarantees being called in by your banker's if a key person passes away or suffers a critical illness?

  • If one or more of your top sales team were lost would your company's sales take a serious hit? Also, do your salesmen have invaluable contacts?

  • How many employees does your firm have? As a rule of thumb the less employees the more the firm will rely on 1-2 key employees
Why not half insure or start small

One idea to consider concerning Ownership/partnership insurance is to part of the necessary money. For example, if each Director's shareholding is worth around £400k consider insuring £100k or £200k etc.

The premiums will obviously be cheaper and if the policy pays out it will go a long way to both helping the remaining Directors to buy out the shares.

Another idea is to start small the cover is very tailorable and can easily be added to in the future

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