Shareholder Protection Insurance

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What is Shareholder Protection Insurance?

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.

What is the buyback of Shares?

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.

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How Does It Work?

There are three main ways shareholder protection insurance can be taken out:

Life of another policy- This method is generally used when there are only two major shareholders. Each shareholder will own the other’s policy and will be the beneficiary of the other’s policy. Premiums are paid for by the individual out of their own pocket, which avoids any tax liabilities upon claiming.
Company Share Purchase – Under this method, the company actually owns the policy and pays the premiums. In the event of a claim, the company receives the money and is able to buy the shares back from the deceased wife or husband. Tax laws can be quite complex with this variation so we would always recommend you seek professional tax advice when setting up a policy this way.
‘Own life’ policy held under a business trust – This option involves each shareholder taking out their own policy and placing the benefit in a business trust. In the event of a shareholder’s death, the money can be used by the remaining shareholder to purchase the shares back and redistribute them to the remaining shareholders.

Most of the time a cross-option agreement will be used alongside the policy. Please check out our blog on cross options agreements.

How Much Cover Do I Need?

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?

What Is The Cost of Protecting Shareholders?

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.

The amount of cover – The more cover the more expensive it will be.
The Term – The longer the term the more expensive it will be. This is due to the risk of covering someone of an older age.
The age of the life assured – The older the person is the more expensive it will be.
Critical Illness – Adding critical illness to a policy will make it more expensive.

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Why Protect Your Shareholders?

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.

A safe and stable business plan – A shareholder’s death is a surefire way of seriously jeopardising a company’s strength and stability. By taking out shareholder protection insurance, shareholders and investors can enjoy peace of mind. Should a fellow shareholder pass away, surviving shareholders will not have to worry about finding the money to buy back the shares. Instead, they will receive funds that allow them to buy up the deceased’s shares quickly and efficiently.
Support for family members – Although shareholders generally have an in-depth understanding of how to run the business, inheriting family members will normally have limited know-how. So, no experience of how to perform the ongoing duties of a shareholder. At the same time, it can be very damaging for a company to have a new member on board who has no idea what they are doing. This is where shareholder protection insurance helps. Most would rather receive a cash value of the shares and move on with their lives. Of course, money can never bring back the loss of a family member, but it will go a long way in helping that family financially.
Critical Illness – You do have the option to take out critical illness alongside shareholder protection. Given the right agreements are in place, a sick shareholder could sell his or her shares and use the money to retire.

Find out all about Shareholder Protection Tax Treatment here.

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