Shareholder protection insurance pays your business a lump sum if a shareholder dies or is diagnosed with a critical illness. It provides the capital to help your company purchase the deceased or critically ill person’s share of the business and avoid potential disruption to the services you offer.
What is shareholder protection insurance?
Shareholder protection insurance is a type of business life cover that enables your firm to continue to run as smoothly as possible in the event of a shareholder passing away or being unable to return to work following the diagnosis of a terminal or specified critical illness. Common reasons for taking out shareholder protection insurance include:
- Maintaining control of the business by being able to buy the deceased’s or critically ill person’s shares
- Making the transition of shares from one owner to another as smooth as possible
- Helping the shareholder’s family and beneficiaries sell shares quickly and at a fair price, should they prefer to do so
- Providing a critically ill shareholder with an income without the need to return to work
- Providing a tax-efficient way to transfer ownership of shares in the business in the event of death or critical illness
Does my business need shareholder protection insurance?
It’s a good idea for a business of all sizes to consider the impact of a shareholder’s death or critical illness. Would you be able to keep control of the business, or would the shareholder’s beneficiaries have other plans? Would you be able to afford to buy their shares if they wanted to release the capital?
A shareholder protection insurance policy gives your business adequate funds to purchase some or all of those shares at a pre-agreed value. The pre-agreed terms would also help to prevent shares of your business being tied up in probate, which can be a lengthy process and may have a significant impact on productivity - and even prevent trading.
By providing your company with the funds to purchase the deceased’s share of the business, a shareholder policy prevents you losing these shares to third parties with different objectives or, in the worst case, to a competitor.
How does shareholder protection work?
The shareholders or your company take out policies to insure the lives of each individual shareholder. If a valid claim is made within the duration of the policy, a lump sum is paid out allowing you to buy the shares from the critically ill shareholder or their beneficiaries. Clear legal agreements are written up stating how the shares should be managed in the event of death or critical illness.
In the UK there are three main types of shareholder protection insurance, each depending on the size and requirements of your business:
‘Life of another’ shareholder protection
This type of policy can be used when the business is owned by two shareholders. Each takes out a policy covering the life of the other, with the policy representing the current value of your partner’s shares in the business.
In the event of their death, you become the surviving shareholder and receive the insurance payout. You can then use these funds to purchase the shares from the deceased’s estate and become sole owner of the business.
Company share purchase insurance
With this arrangement, your company takes out a policy for each of the shareholders, with the policy for each person matching the value of their shares. In the event of a shareholder’s death, it is the company that receives the payout, which can then be used to purchase the shares and retain control.
Due to its complexity in nature, and to ensure compliance with tax and legal procedures, the use of corporate lawyers and tax advisors is often recommended when taking out company share purchase.
‘Own life’ policy held under business trust
As an alternative to the company share purchase option, an ‘own life’ policy involves each shareholder taking out an individual policy which is held under a business trust. If a shareholder dies, the remaining shareholders can use the policy payout to purchase the shares, with the shares to be divided equally.
How do I compare stakeholder protection policies?
ActiveQuote can help you to compare stakeholder protection policies. Our online comparison tool finds and compares quotes from leading life insurance providers including Aviva, VitalityLife and Zurich, helping you to find the best policy for your business.
If you’d rather get advice and support from our impartial experts over the phone, call ActiveQuote for free on 0800 862 0949.
