"It is therefore immediately available to fund the purchase of the former business partner’s stake."
A cross-option agreement can be put in place to ensure that if one of the shareholders were to die or become critically ill, the company can purchase the business interest from the shareholder's estate using the policy payout.
A cross-option agreement grants the surviving director a ‘call option’, which is a right, not an obligation, to purchase the deceased’s shares at market value.
On the other hand, it gives the deceased’s estate a ‘put option’, again not obligatory, to sell the shares to the surviving director at market value.
In this case, only one of the parties needs to exercise their option to buy or sell the shares for the agreement to be binding.
Finally, three relevant life policies can be created for the valued employees. The premiums are usually classed as a deductible business expense and hence attract corporation tax relief for the company.
On a successful claim the sum assured is paid into a relevant life trust for the benefit of the beneficiaries who are named, for instance a family member, and not for the business.
As such it can be seen to benefit those working for the company more than the company itself, Harries says.
However, the company will benefit from the tax relief, and this allows an employer to provide life cover where they do not have a sufficient number of employees to offer a group scheme, or only want to cover a small number of employees.
Cost
As with most protection policies, the cost will depend on a number of factors, including age, lifestyle, health and so on.
The premiums can also become cheaper by using a renewable clause option.
For £1mn of life cover, a relevant life policy for a 35 to 40-year-old could cost around £35 to £75 a month with renewal clause, and around £100 to £150 without, Harries says.
Key person or shareholder protection for the same person (but this time including £500,000 of critical illness cover) could come to about £140 to £200 a month, though CI can be removed to reduce the cost.
Harries says any company researching business protection should become familiar with the tax implications of the policy, as there may be tax reliefs to be claimed. But what tax relief is awarded, and how and when tax would become due, depends on a number of variables.
A company should also consider whether CIC is needed alongside life cover, as relevant life does not include CI, Harries says.
