Key Person Insurance vs Shareholder ProtectionWhich Does Your Business Need?

The fundamental difference between key person insurance and shareholder protection:

• Key person insurance answers: "How will the business survive financially if this person dies?"
• Shareholder protection answers: "How will the surviving shareholders buy the deceased's shares?"

They solve different problems, even though both are triggered by the same event (death or critical illness of a key shareholder).

You need key person insurance when:

• The business would lose significant revenue if a key person died
• You need to fund recruitment of a replacement
• Business loans are secured against a key person
• Clients would leave or contracts would be lost
• The business needs cash to survive the transition period

The payout goes to the company and can be used for any business purpose - there are no restrictions on how the money is spent.

You need shareholder protection when:

• The business has multiple shareholders
• You want surviving shareholders to retain full control if one dies
• You want to prevent shares passing to the deceased's family (who may not want to be involved in the business)
• You need a mechanism to buy shares at a fair price without draining business cash
• The deceased shareholder's family needs to receive fair value for their shares

Shareholder protection works alongside a cross-option agreement that gives surviving shareholders the option to buy and the deceased's estate the option to sell. See our shareholder protection guide for full details.

Many businesses need both key person insurance AND shareholder protection. Here is how to decide:

• Sole director with no other shareholders - Key person insurance only (no shares to transfer)
• Two equal shareholders who both work in the business - Both types recommended
• Multiple shareholders, some not active in business - Shareholder protection for all; key person insurance for active shareholders only
• Company with external investors - Key person insurance likely required by investors; shareholder protection between founding shareholders

The combined cost of both policies is usually modest relative to the protection they provide. A specialist adviser can help structure the arrangement correctly.