Key person insurance and shareholder protection both pay out when someone a business relies on dies, but they pay different people for different jobs. Key person insurance pays the company to absorb a loss; shareholder protection pays the surviving owners so they can buy a deceased owner's shares.

For a particular business, an FCA-authorised broker can help pick between them; the call-back is free and starts from this page's form.

How do the two arrangements differ at a glance?

Key person insuranceShareholder protection
Whose lifeAnyone whose death would hit the business, owner or notThe owners, each on their own life in the set-up Legal & General suggests
Who owns the policyThe company, usuallyEach owner, written in trust for the others in that set-up
Who is paidThe companyThe other owners, through the trustees
What the money is forLosses the business suffersBuying the deceased owner's shares
Agreement between ownersNo share sale to regulateUsually a cross-option agreement

The sections below take each difference in turn. What each product is on its own is covered in what key person insurance is for and what shareholder protection insurance is.

Who owns each policy, and who gets the money?

Legal & General's key person page says: "The policy is owned and paid for by the employer, so any pay-out is payable to the employer." Royal London's adviser guidance adds that for a company there is no need for a trust, because the company owns the plan, pays the premiums and receives the proceeds. The key person is the life assured and does not own the policy; who owns key person insurance goes into the exceptions, such as partnerships.

Shareholder protection turns that round. In Legal & General's suggested method, "each owner must effect and maintain a life or life and critical illness policy which is written in trust from outset for the other owners." So the owner pays for a policy on their own life, and the people who benefit are their co-owners. Royal London's guide says that where there are only two or three owners, they can instead take out plans on each other's lives, and that this may not suit more than two or three owners, since a four-shareholder company could need twelve plans.

What is the money for?

Key person money is for the business's own losses. Legal & General's technical guide, written for advisers, calls it "simply a business insuring itself against the financial loss it may suffer as a result of the death (or critical illness if chosen) of a key person", and lists lost profits and the cost of recruiting or training a replacement among those losses. The money is the company's to set against those losses, and no shares change hands. How a sum might be worked out is in how to calculate key person insurance.

Shareholder protection money is for one transaction. The same guide says the arrangement "enables the surviving owners to purchase the deceased owner's share of the business from the deceased owner's estate and ensures that the deceased owner's dependants have a willing buyer and cash instead of a share of the business." The practical difference is who ends up holding the shares.

Why does shareholder protection need a trust and an agreement?

In the own-life set-up, the trust is what carries the proceeds to the surviving owners instead of into the deceased owner's estate. How trusts work in general is set out in our guide to life insurance trusts, and whether one suits a particular business is for a solicitor or tax adviser.

The agreement is what turns cash into shares. A cross-option agreement lets the survivors buy and the estate sell, but, in Legal & General's words, "neither is obliged until the other uses their option." The owners can use their option within three months of the date of death, and the personal representatives within six months.

Critical illness works differently here. There is no option for the other owners to buy from a critically ill owner; instead a single option lets that owner choose to sell, for six months after the critical illness claim is paid, while the co-owners have no matching option to buy. How an individual insurer words that option is a point the broker can walk you through after the call-back.

Key person insurance has no equivalent of any of this, because there is no sale to arrange.

Is key person insurance a business continuity plan on its own?

It covers the money side only. Royal London describes shareholder or partnership protection as the cover that "ensures business continuity by providing funds available to the remaining shareholders or partners to enable them to purchase the deceased or critically ill shareholder or partner's share of the business." Key person insurance keeps cash in the company; it does not settle who owns the shares afterwards.

A business with owners who also drive its profits may therefore look at both, as separate policies with separate owners and payees. Other covers sit beside these two: business protection insurance sets out the wider family, including loan cover, and relevant life cover, which pays an employee's family rather than the business, is compared in key person vs relevant life; the business and workplace cover guides list the rest. Costs are in what key person insurance costs and what shareholder protection costs. To see how both would work for your own company, ask the broker who phones after you send details through this page's form; the explanation is free.

Frequently asked questions

What is the difference between key man insurance and a buy and sell agreement?

Key person (or key man) insurance is a policy that pays the company; a buy and sell agreement is a contract between owners. HMRC's Inheritance Tax Manual says only most exceptionally does an owners' agreement count as a binding contract for sale, and that when one does it prevents the shares qualifying for business relief. Legal & General's guide warns that a binding buy and sell clause may lose Business Property Relief that could otherwise apply.

Do the critical illness options work the same way in both?

Not quite. Either can include critical illness cover if chosen, but a key person claim pays the company: Royal London notes the key person may return to work, so the money could pay a temporary replacement or replace lost profits. With shareholder protection, any sale after a critical illness is at the ill owner's choice, as set out above; critical illness cover for a business goes further.

Is the tax treatment the same?

It depends on who pays the premiums and who receives the money, so the two are looked at separately. The general position is set out in is key person insurance tax deductible and is shareholder protection tax deductible.

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