Introduction
We recently helped two company directors arrange business protection insurance to protect their company’s ownership and financial stability.
Our customers were equal shareholders in an established business and wanted to put suitable protection in place alongside a new shareholder agreement.
One of the main difficulties was arranging shareholder protection and key person cover while taking account of the directors’ different circumstances and previous medical disclosures.
Following discussions with insurers and coordination with the company’s professional advisers, we arranged the required protection through Legal & General.
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The Scenario
Our customers were two company directors who jointly owned an established trading business.
They were reviewing their business protection arrangements following discussions about a new shareholder agreement.
An important consideration was what would happen if either director passed away. Without appropriate financial arrangements, the surviving shareholder could face difficulties funding the purchase of the deceased director’s shares.
The directors also wanted to protect the company against the financial consequences of losing a key person whose involvement was important to the business.
Based on a company valuation of approximately £1 million, the protection requirements were:
- £500,000 of shareholder protection for each director.
- £300,000 of key person protection for the Managing Director.
- Three-year policy terms.
- Protection structured alongside the company’s shareholder agreement.
The directors needed the cover to reflect their respective shareholdings, meet the company’s protection requirements and remain within an acceptable budget.
The Challenge
There were several considerations when arranging the business protection policies.
Protecting Both Shareholders
As the directors owned equal shares in the business, they wanted sufficient shareholder protection to provide funds towards purchasing the other director’s interest if one passed away.
This required the amount of life cover to reflect the company’s valuation and the proposed shareholder agreement.
The arrangement also needed to work alongside the legal provisions governing what would happen to the shares following a shareholder’s death.
Arranging Separate Key Person Protection
Shareholder protection would not necessarily address the financial disruption caused by losing someone who played an important role in running the business.
The Managing Director therefore also required key person insurance.
This was a separate protection need, intended to provide the business with financial support if the insured director died during the policy term.
We needed to consider both types of cover rather than treating them as interchangeable.
Previous Medical Disclosures
Both directors had medical information that required consideration during the insurance application process.
Pre-existing health conditions and previous medical investigations can affect how insurers assess life insurance applications.
Different insurers may take different approaches to medical underwriting, potentially affecting the terms offered or the cost of cover.
The challenge was identifying providers able to consider the relevant disclosures while meeting the required protection amounts and policy structure.
Coordinating the Legal Arrangements
The protection policies also needed to be considered alongside the new shareholder agreement.
The proposed arrangements included cross-option provisions, which are designed to give surviving shareholders and the deceased shareholder’s estate options for the purchase and sale of shares.
It was important that the proposed insurance arrangements were compatible with the legal structure being prepared.
What We Did
We began by reviewing the company’s circumstances, ownership structure and the protection requirements identified by the directors.
This included examining the draft shareholder agreement, the business valuation and the proposed levels of cover.
Reviewing the Shareholder Agreement
We considered how the planned shareholder arrangements related to the insurance requirements.
With each director holding an equal share in a business valued at approximately £1 million, the proposed £500,000 of cover for each shareholder reflected their respective interests.
We also liaised with the company’s accountant and legal professionals regarding the draft agreement and the proposed protection structure.
This helped ensure that the insurance recommendations were considered alongside the wider business arrangements.
Researching Insurers and Medical Underwriting
We researched business protection providers across the market, looking at both shareholder protection and key person insurance.
As the directors had different medical backgrounds, we considered how individual insurers approached the relevant underwriting disclosures.
We contacted insurer representatives and discussed the circumstances with a business development manager and insurer before placing the applications.
These discussions helped us assess which providers were appropriate for the protection being requested.
We also obtained the relevant medical declaration information and supporting business details needed for the applications.
Using Different Insurers
Rather than automatically placing all the protection with one company, we considered the individual requirements of each director and the different purposes of the policies.
Our research identified suitable arrangements using Legal & General.
This approach allowed us to match the protection requirements and medical underwriting considerations to the insurers selected.
The Solution
We arranged business protection through Legal & General, covering the two separate needs identified during our review.
Shareholder Protection
We arranged £500,000 of shareholder protection for each director.
The purpose was to provide funds that could support the purchase of a deceased shareholder’s interest in the company, subject to the terms of the policies and the relevant legal agreements.
The policies provided level cover, meaning the amount of protection remained fixed during the policy term.
Key Person Protection
We also arranged £300,000 of key person life insurance for the Managing Director.
This provided separate financial protection for the business against the insured director’s death during the policy term.
The protection arrangements included terminal illness benefit, subject to the relevant policy definitions and conditions.
The cover was arranged over the required three-year terms.
Why This Solution Worked
The solution addressed two different financial risks within the same business.
Shareholder protection was arranged to support the company’s ownership succession arrangements, while key person insurance addressed the separate financial impact of losing an important director.
Using Legal & General also allowed us to consider the directors’ individual medical circumstances rather than relying on one insurer for every policy.
The insurance arrangements were considered alongside the company’s valuation and draft shareholder agreement, helping to align the protection with the directors’ intended business arrangements.
The Result
We successfully arranged the required business protection policies Legal & General.
The completed arrangements provided:
- £500,000 of shareholder protection for each director.
- £300,000 of key person protection for the Managing Director.
- Three-year policy terms.
- Cover arranged following consideration of the directors’ medical disclosures.
Both directors obtained the protection required for their respective shareholdings, while the business also had separate protection for the Managing Director.
The case was completed following a professional referral, with the insurance arrangements addressing the business protection requirements identified during our review.
What This Case Shows
The result highlights why shareholder protection and key person insurance should be considered separately when reviewing a company’s financial risks.
A business may need funds to address the ownership consequences of a shareholder’s death, while also requiring protection against the financial impact of losing someone important to its operations.
It also shows how previous medical conditions do not necessarily prevent company directors from obtaining business protection.
Insurers assess medical disclosures differently, so researching the available underwriting options can be an important part of arranging suitable cover.
In this case, reviewing the business structure, coordinating with professional advisers and using two insurers helped us arrange protection for both directors and the company.
Need Help with Business Protection Insurance?
If you are a company director or shareholder and are considering shareholder protection or key person insurance, Kerr & Watson can help you review your options.
Whether you are updating a shareholder agreement, reviewing existing insurance or arranging protection where medical conditions may affect an application, we can assess the available solutions based on your circumstances.
Contact Kerr & Watson to discuss your business protection requirements.
