Two common types of life insurance policies that businesses will consider adding to their expenses are relevant life insurance and shareholder protection insurance.
While both provide valuable coverage, they serve different objectives and have their own benefits that could actually work hand in hand rather than one or the other.
Relevant Life Insurance
Relevant life insurance's main objective is essential for a death in service, which essentially ensures that the value of your insurance is paid directly to your family in the case of your death.
So if you were insured up to 100,000 pounds, a lump sum of it would be paid to the family. This cover is beneficial to the company and employees as it provides tax relief, saving the company thousands of pounds while giving the employee some reassurance that you and your family matter deeply to the company.
So you might be wondering who would see this as a useful form of insurance. This policy is only useful for companies with directors and employees who are valuable to the company, quite similar to keyman insurance.
You wouldn’t choose relevant life insurance if you were a sole trader or didn’t see the benefits of the policy.
Depending on the company you are insured with, there is room for you to customize the terms and conditions, making it more valuable to have than standard life insurance. However, this is based on the person's description, as once you leave the company that is it.
You won’t be valued for relevant life insurance when you die later. The policy payout to companies can be used for:
- Replacing the employee can be a costly, time-consuming, and lossful period.
- Reduce the financial burden of the company, such as by channeling those funds into business loans.
- Invest the money into the business to fuel growth even during an uncomfortable period.
- Buy out the deceased’s shares from the family members.
So while relevant life insurance can have some sort of influence on shareholder protection, it’s not a direct policy that protects their key person's shares. There is always a chance that the beneficiary doesn’t want to sell and this makes it difficult.
Shareholder Protection Insurance
Shareholder, known as buy-sell insurance, is specifically designed to facilitate the purchase and sale of shares within your company when a shareholder dies, retires, or becomes unable to be involved. It ensures that you know what is going to happen with the shares.
A good scenario it could protect you from is when shares are passed onto a family member who doesn’t know or understand the brand, such as a widow, a son, or a daughter, who could have a large influence in the company without knowing anything about it.
This protection allows a smooth transition from the shares to the remaining shareholders. This policy typically pays out a lump sum to the remaining shareholders, which can be used for several things, including:
- Buying out the deceased shares at a pre-agreed market value.
- Provide liquidity to the deceased shareholder's estate, which can help the family settle debts and financial obligations.
- Maintain business continuity through a seamless transfer of ownership and prevent disruption to operations.
Key Differences Between RLI and SPI
The Purpose
The purpose of each insurance policy is a key difference, as relevant life protects the company’s financial interests in the case of an employee's unexpected death and can provide some financial support to their families.
Shareholder protection insurance provides comfort to companies concerning who the shares would land to, giving the remaining shareholders multiple options to foster some more control.
Beneficiary
The beneficiary of relevant life insurance goes to both the company and the family of the insured, while shareholder protection only goes to the remaining shareholders.
Use of Benefits
Relevant life insurance can be used in a range of circumstances, such as hiring a replacement, investing, repaying loans and so forth, while a shareholder protection sum is made to buy back the shares.
Choosing the Right Policy
So when it comes to picking the right policy, you might feel like you want both with some added extras or you might be a smaller business and not need all of these specific policies. It’s all about what feels fitting for your company but just know that these policies can be used in combination rather than just picking one.
We would always recommend that you reach out, and give a full description of the company and they will be able to get back to you with an entire list of policies and why they would benefit your specific company.
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