The Difference Between Key Person and Shareholder Cover
If you own or run a business, you've probably heard terms such as Key Person Cover and Shareholder Cover.
They both form part of business protection planning. They can both involve insurance. And in some businesses, the same person may be both a key person and a shareholder.
So what's the difference?
The simplest way to think about it is:
Key Person Cover is about the impact on the business when an important person is lost.
Shareholder Cover is about ownership and funding when a shareholder dies or exits unexpectedly.
They address different risks.
What is Key Person Cover?
Some people are particularly important to the success of a business.
It might be the owner who has spent 20 years building relationships with major clients. It could be a salesperson who generates a significant proportion of the company's revenue. Perhaps it's an employee with specialist technical knowledge that would be difficult to replace. Or it could be someone whose leadership, experience or industry connections are central to the business.
If that person dies or becomes unable to work, the business may face financial consequences.
Revenue could be affected. Clients may need reassurance. Other employees may have to take on additional responsibilities. The business may need to recruit and train a replacement. There may be costs associated with keeping the business operating while it adjusts.
Key Person Cover is about addressing the financial impact that losing that important person could have on the business, subject to the terms and conditions of the relevant policy.
What is Shareholder Cover?
Shareholder Cover deals with a different question:
What happens to the ownership of the business if a shareholder dies or exits unexpectedly?
Shares are an asset owned by the shareholder.
If a shareholder dies, their shares may form part of their estate, depending on the circumstances and relevant legal arrangements. The remaining shareholders may want the opportunity to purchase those shares so that ownership remains with the existing owners. At the same time, the deceased shareholder's family or beneficiaries may reasonably expect to receive financial value for those shares.
This creates two different needs:
The remaining shareholders may need funding to purchase the shares.
The deceased shareholder's estate may need the value of those shares.
Shareholder Cover can be structured to provide funding for the potential purchase of shares following the death of a shareholder, depending on the arrangement and policy terms.
So what's the actual difference?
A simple example can help.
Imagine three people own a business together. One of them is also responsible for the company's biggest client relationships. If that person dies, there could be two separate issues.
Issue 1: The business has lost an important person
The business may lose valuable knowledge, relationships and revenue.
There could be costs involved in replacing or restructuring their role.
This is the Key Person Cover issue.
Issue 2: The business has lost a shareholder
That person's shares don't simply disappear. Their ownership interest may become part of their estate. The remaining shareholders may want to purchase those shares.
Funding may be needed to make that possible.
This is the Shareholder Cover issue.
One person.
Two different risks.
Two different cover considerations.
Why the distinction matters
It's easy to assume that if you have Key Person cover on a shareholder, you've automatically dealt with the ownership risk as well.
That's not necessarily the case.
The reason is simple:
The business can be affected by losing the person, while the ownership can be affected by losing the shareholder.
Those are different problems.
Key Person Cover focuses on the business impact.
Shareholder Cover focuses on ownership and funding.
The insurance arrangements, ownership structures and agreements need to reflect the particular risk being addressed.
What if the shareholder is also the key person?
This is where things can become particularly important for smaller businesses.
The owner of a business may wear several hats.
They might be:
A shareholder
A director
A key person
The primary income earner
The person responsible for major client relationships
The person making most important business decisions
If something happens to them, several things can change at once.
The business may lose their contribution.
The ownership may need to be dealt with.
Their family may need financial support.
Business debts may still need to be serviced.
Employees and clients may need reassurance.
This is why business protection shouldn't necessarily be viewed as a single policy or a single conversation.
It's not just about death
Another important distinction is that the risks being considered can differ depending on the arrangement.
A business may need to think about what happens if a key person becomes seriously ill or is unable to work.
Shareholder arrangements may have their own provisions around death, ownership and the circumstances in which shares can be bought or transferred.
The exact arrangements depend on the business structure, agreements and policies involved.
That's why it is important to understand what risk you're actually trying to protect against before deciding what type of protection may be appropriate.
A simple way to remember it
If you struggle to remember the difference, think about these two questions:
Key Person Cover
“What happens to the business if this person is no longer here to contribute?”
Think:
People → Revenue → Knowledge → Relationships → Business continuity
Shareholder Cover
“What happens to the ownership if this shareholder is no longer here?”
Think:
Shares → Ownership → Estate → Funding → Continuity
The two can overlap, but they aren't the same thing.
Protection works best when the pieces fit together
Good business protection isn't necessarily about having the most insurance possible.
It's about understanding the risks that could have the greatest impact on your business and considering how those risks would be managed.
You might need to consider:
Who the key people are
What would happen if they couldn't work
Who owns the business
What happens to shares if an owner dies
How a share purchase could be funded
What agreements are already in place
What debts or guarantees exist
How the business supports the owner's family
The answers may be different for every business.
And that's why there isn't a one-size-fits-all approach.
You've built the business - know what you're protecting
Your business may depend on particular people.
It may also depend on a particular ownership structure.
Those are two different things.
Key Person Cover is about protecting the business from the financial impact of losing an important person.
Shareholder Cover is about helping address the ownership and funding issues that can arise when a shareholder dies or exits unexpectedly.
Sometimes the same person creates both risks.
Understanding the difference is the first step towards understanding whether both need to be considered.
Because when you've spent years building a business, it's worth knowing not just what you've built, but what could happen to it if one of the people behind it is suddenly no longer there.
If you're a business owner or shareholder, it may be worth reviewing who the key people are, how ownership would be dealt with if a shareholder died, and whether your existing agreements and protection arrangements still reflect your intentions. New Vision Financial Services can help you understand the insurance aspects of Key Person and Shareholder Cover and work alongside your legal and accounting advisers where appropriate.
Amy Callon
Financial Adviser
New Vision Financial Services
Plan your future and let us help you have peace of mind along the way.