• Careers
  • Contact Us

Life Insurance and Succession Planning for Family Businesses

on Monday, 10 April 2017.

Death, especially the untimely death, of a key individual can put enormous pressure on a family owned business and the family members who rely on it for income and capital growth.

Thinking about how you would cope, and what options are available to protect against the unexpected death of a key family member in the business, should be a key part of your family business succession planning.

Insurance Options

Life and critical illness insurance is often considered as a way of creating a fund to either buy in the right level of external expertise to replace the deceased (key man insurance) or to buy out and provide a lump sum for their family (cross option insurance).

Cross option insurance works by creating options to buy or sell shares owned by a family member, with the proceeds of life insurance payable on death (or sometimes on critical illness) written in trust for the survivors. It must be an option, not an obligation, to avoid inheritance tax complications.

So as an example, Charlotte, Anne and Emily are equal shareholders in a family owned publishing business. Each is insured under cross option arrangements. Therefore if Charlotte dies, Anne and Emily as beneficiaries of her life policy are able to use the proceeds of £500,000 to buy her shares under the option. They then become equal shareholders, and Charlotte's beneficiaries receive £500,000 from her estate.

Is That It Then?

This works well if Anne and Emily can continue to run the business without Charlotte, and if her share of the family business was actually worth around £500,000. If the business had grown in value significantly from the time they put the insurance arrangements in place, it was perhaps not such a good solution (for Charlotte's beneficiaries anyway). Also it may still mean problems for the surviving sisters if Charlotte's death leaves a management or leadership hole. Insurance can also be very expensive (especially critical illness cover). Cross option insurance arrangements perhaps work best in a business which is not likely to grow quickly - a lifestyle business perhaps.

Other Problems - Where There's a Will

If a key shareholder dies, there is the issue of who inherits the shares, and whether there are any restrictions on who is entitled to be registered as a shareholder. There can also be a gap before shares can effectively be voted. Dying intestate creates even more problems. We will look at these issues in more detail in later issues of our Family Business Law Brief, but for the moment, the message is that your family business succession planning should involve a holistic approach that involves your wills, as well as what you might agree in shareholders' agreements and company articles of association.

The Long View

Although it will never be possible to cover every eventuality, all businesses, family owned or otherwise, should be planning for who comes next to run the business, and continually reviewing and plugging skills gaps. If you can get your family business to the point where your passing will be a time of quiet grief rather than panic and strife, you will have added huge value to your business, and done your family a great favour. A counsel of perfection perhaps, but worth striving for.


If you would like any further information, please contact David Emanuel in our Family Business team on 020 7665 0848.

Leave a comment

You are commenting as guest.