Business Insurance Cover

We often get asked about business insurance, especially in regards to business succession planning. Here is a general outline of the most common business insurances available (it is not designed to cover all).

Key Person Cover

Purpose: To protect the company against the financial impact of a permanent or long-term loss of a Key Person.

Policy Ownership: Owned by the Company

Type of Cover

  • Life Cover which provides a lump sum if the Key Person dies
  • Long Term Disability Cover – provides a lump sum if the Key Person is disabled and unable to return to work
  • Business Continuation Cover – provides a monthly amount to the Company for a maximum of two years or until the Key Person is able to return to work, whichever is earlier.
  • Tax Implications: Life Cover and Long-Term Disability Cover are not tax deductible. Business Continuation Cover is tax deductible.

    Debt Protection Cover

    Purpose: To pay down debt if a key person dies or is permanently disabled.

    Policy Ownership: Owned by the Company

    Type of Cover

  • Life Cover which provides a lump sum if the Key Person dies
  • Long Term Disability Cover – provides a lump sum if the Key Person is disabled and unable to return to work
  • Tax Implications: Not tax deductible but payments received are tax free.

    Shareholder Protection

    Purpose: To provide the funds for an existing shareholder (s) to purchase the shares from a disabled shareholder or from his/her estate in the event of death

    Policy Ownership: Shareholders own policies on each other (normally through a corporate Trustee). Premiums are normally paid from Company bank account and debited to shareholder account. Company can also own the policy but adds a degree of complexity in that the shares need to be cancelled and can’t merely be transferred to existing shareholders for no exchange of value. Also need to ensure that the payment to the shareholder/estate is not deemed to be a dividend. If Company is to own the policy advice should be sought from an appropriately qualified tax practitioner.

    Type of Cover

  • Life Cover which provides a lump sum if the Shareholder dies
  • Long Term Disability Cover – provides a lump sum if the Shareholder is disabled and unable to return to work
  • Tax Implications - Not tax deductible but payments received are tax free if structured correctly.

    Legal Agreement: This is where many Companies rely on the Shareholder Agreement but in most instances, this agreement is silent on how the purchase of the shares is to be funded. Best practice is a separate Buy and Sell Agreement which sits alongside the Shareholder Agreement. This agreement needs to make specific reference to the insurance cover and how the proceeds are to be dealt with and is an integral part of effective business succession planning.