Shareholder Protection Insurance
Protecting you and your business...
Should a shareholder die or suffer a terminal illness (diagnosed with less than 12 months to live) the plan would payout a lump-sum to the other shareholder(s).
Cross-Option Agreement - Provides the right for the other shareholders to buy the shares ('Call' option) and the right for the deceaseds family to sell ('Put' Option).
This option enables the plan to payout if the shareholder were to suffer a serious illness.
Cross-Option Agreement - Only a 'Put' option exists giving the shareholder who has suffered the critical illness the right to sell their shares to the other business owners.
How does Shareholder Protection work?
A shareholder dies or suffers a critical illness condition as defined in the insurers terms.
The other shareholder(s) make a valid claim with the insurer as per the policy terms.
The insurer pays the sum assured
That shareholder or their family can then be bought out.
Do we need
If business owners have a sizable percentage of their personal capital tied up in the company then shareholder protection can be an important policy to hold.
What is the risk of death?
Based on ONS life expectancy data (2008-10), the chances of someone passing away within the next 10 years are as follows:
Research from Met Life in 2012 revealed that 21% of people have suffered long term ill health during their working life so critical illness cover is a very important policy addition.
Being Independent Insurance Advisers we pride ourselves on being the experts, knowing every insurance product we offer inside out and back to front. Here's how we work -
The Fact Find:
Without initial planning and consideration if a director or business partner dies the surviving directors could run the risk of the shares passing to someone with no interest in the company.
A protection policy taken out on the relevant shareholder could ensure the surviving business owners have the right to and are able to afford to buy the deceased's share of the business from his or her estate.
Such business protection ensures difficult questions are avoided and the beneficiaries of the deceased's estate can realise the value of their share of the business.
If a business partner dies without making specific provisions for their share of the business their interest in the company will likely pass to their estate. The family then has two alternatives
Neither of these avenues is problem-free. If a member of the family takes over the deceased's position as a partner there is no guarantee that he or she will be able to make any contribution to the business. In fact, in some cases their presence could be detrimental to the business.
A sleeping partner who is not involved but is entitled to a share of the profits may be a huge burden to the remaining partners. Also the family may be unhappy to be in a position where they have no effective control over the profits of the business which they may be relying on for income.
If the interest is sold the remaining partners may find themselves working with an unwelcome new partner. Or indeed there may be no natural buyers, in which case financial problems may surface not only for the family but also for the business.
By arranging Directors Protection or Partners Share Protection you are able to ensure the remaining partners have the right and the financial backing to buy the deceased's share of the business should the worst happen. Each partner takes out a life insurance only or a life and critical illness policy written in the trust of the other partners.
Cross Option Agreement
In the process of setting up the appropriate business protection it should also involve setting up a cross option agreement with all the directors/partners in the business, enabling the remaining directors or partners to purchase the share of the business from the deceased's estate.
This agreement in turn provides the dependents with a willing buyer and with cash instead of shares or an interest in the business ensuring the right people remain in control of the business.
The individual partners pay the premiums of the policy, as protection insurance premiums tend to be based on personal factors such as age, gender and the sum assured the premium payments do not necessarily reflect the benefit each surviving partner may recieve in the event of a claim.
To account for the variance in premium costing relative to share holding the total monthly premiums can be apportioned according to each of the partners share in the business.
A 2011 study by Legal & General carried out with the Institute of Directors took place to understand the security of assets, shares and cash flow of businesses with some of the highlights detailed below.
As each individual shareholder takes out the policy themselves they will pay the premiums out of their taxed income and will not receive income tax relief on those premiums.
As the policies tend to be set up in trust any proceeds will not normally form part of the deceased's estate and thus will not be subjuct to a potential inheritance tax liability.
As with any financial product it is important to consult a tax expert to ensure your own specific position regarding any potential tax liability.
Shareholder protection policies are often set up in trust where each partner would request the protection policy be set up on their life under trust for the benefit of the other partners.
In such a case the other partners are likely to be appointed as trustees. In the event of a claim, the other partners as the beneficiaries of the trust would then have available the money to buy the seriously ill or deceased partner's share of the company.
As with the other guides to business protection, this shareholder protection overview should provide you with a good basic understanding of the policy's value in ensuring the future of the business during such difficult times.
Should you require further information, advice or guidance please do not hesitate to call us on 0800 612 7897.
10/01/2015 N Tanner
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