Shareholder protection insurance explained

OK, let’s fast forward a few months and life is beginning to return to normal, or as close to normal as it was before the coronavirus pandemic. On a personal level, sales are shooting upwards as customers who have been starved of your products and services make up for lost time, margins are equally impressive, and your bottom line is looking healthier by the day. All in all, your business is getting back on track again, not quite tickety-boo, but well on the road to recovery.

Just the fact that you are still trading after surviving an unprecedented economic crisis proves that your business is robust, and you and your team have shown the necessary resilience to bounce back when others have not been able to. All this gives you a sense of invincibility, making you feel as if nothing can go wrong now… can it?

Well, yes it can go wrong and often does and that is why you need to be prepared and protect all aspects of your business, especially after what you have been through this year.

Business insurance is the obvious answer to safeguard against all manner of eventualities, but one type is often overlooked, and that is shareholder protection insurance.

What is shareholder protection insurance?

This is a type of business life cover that will pay your business a lump sum when a shareholder dies or becomes unable to return to work following the diagnosis of a terminal or specified critical illness. This capital will help your company purchase the critically ill or deceased person’s share of the business and enable the business to continue operating with the minimum amount of disruption.

What are the reasons for taking out shareholder protection insurance?

As well as the one just mentioned above there are several other reasons why companies take out shareholder protection insurance. It ensures that the transition of shares from one owner to another is as seamless as possible. If the shareholder’s family and beneficiaries want to sell the shares then this policy enables them to be sold promptly and at a decent price. A policy will provide a critically ill shareholder with an income if unable to return to work. And it is a tax efficient method of transferring ownership of shares in the company.

 Does my business need this type of insurance?

To help you decide whether your firm needs shareholder protection insurance you need to ask yourself a couple of questions about what sort of impact the death of a shareholder might have on the business. For example; would you be able to maintain control of the business or would his or her beneficiaries have other plans? Could you afford to buy their shares if they wanted to sell them?

In such an event a shareholder protection insurance policy provides your business with sufficient capital to buy some or all of those shares at a pre-established value. It also means those shares won’t be caught up in probate, which can be a time consuming process and have a detrimental effect on trading. By having the funds to buy the shares you don’t have to worry about the shares being lost to competitors or third parties with conflicting interests.

How does shareholder protection insurance work?

The company’s shareholders take out policies to insure the lives of each shareholder and  legal agreements are drafted stating how the shares should be managed in the event of critical illness or death. Then when a valid claim is made a lump sum is paid out enabling the business to carry out the instructions in the agreement.

There are three main types of shareholder protection insurance available and the size and requirements of your business will determine which policy you select.

Firstly, is the ‘Life of another’ shareholder protection – This is suitable for businesses owned by just two shareholders and each one takes out a policy covering the life of the other to the current value of the partner’s shares in the business. If one passes away, the surviving shareholder can buy the shares from the deceased’s estate and becomes sole owner of the firm.

Secondly, ‘Own life’ policy held under business trust – Each shareholder takes out an individual policy which is held in a business trust. If a shareholder passes away, the shares are purchased and divided equally.

Finally, Company share purchase insurance – Here the company takes out a policy for each shareholder that matches the value of their shares. In the event of a shareholder’s death, the company receives the payout to purchase the shares and retain control.

For advice regarding this complex but very important subject you can speak to one of our experts by clicking here