Shareholder Protection Insurance is a life insurance policy designed to facilitate the buyback of shares from a deceased shareholder.
One of the most damaging events a business can fall victim to is the death of a major shareholder. Should a shareholder or owner die unexpectedly, the event can have a serious impact on the company, not to mention the shareholder’s family. So, along with key man insurance, companies should also look seriously at shareholder protection insurance.
Buying back shares is the procedure of buying the shares back from the deceased’s (or seriously ill) shareholder’s estate. Shareholder Protection Insurance is a life insurance policy designed to facilitate this buyback. In the event of death or critical illness, a sum of money is paid to the remaining shareholders to allow them to buy back shares from the deceased shareholder’s wife or husband. In effect, this allows the remaining shareholders to retain ownership of the company. It also rewards the wife or husband with the monetary value of the shares they have inherited.
There are three main ways shareholder protection insurance can be taken out:
Most of the time a cross-option agreement will be used alongside the policy. Please check out our blog on cross options agreements.
This will depend on how much the company shares are worth and what you would be willing to sell them for. Businesses will sometimes need to be valued in order to get an idea of the value of each shareholding.
As a rule of thumb, each person should be covered by the value of their shareholding. Most companies take out a cover for a term of 5 years and, of course, share values can go up and down. In this scenario, we can recommend index linking the cover. This means the sum will go up every year. Or just cover yourselves for more than the current value to try and foresee any increase in value.
It may be worth seeking professional advice on the value of the company before valuing the shares. We also generally advise clients to think about what amount of money they would want their family to receive for the value of their shares. If you were to die or become ill, what would you want to sell your shares for?
The cost of shareholder protection insurance will depend on each individual life assured. Quotes will be based on the age, sum assured, smoker status and term of the policy. Actual terms offered will also depend on the health of the individual.
Why not give us a call or fill in the above quote form to get a quote? It takes no more than 5 minutes.
It doesn’t matter what type of industry you work in. Losing a shareholder to death or serious illness can be catastrophic. It is therefore critical to ensure that you protect your business and livelihood with shareholder protection.
Find out all about Shareholder Protection Tax Treatment here.
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