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If you’re a shareholder in a company with multiple other shareholders, it makes sense to consider Shareholder Protection Insurance.
This is because Shareholder Protection covers both you and the company, the shareholders. It pays out if a shareholder dies, giving your business the cash it needs to buy back the deceased shareholder’s shares from their estate.
It provides security for both the business / its shareholders and the family of the shareholder who has died.
The company keeps control of the shares and therefore the business. Meanwhile, the family gets cash compensation for the shares they’ve inherited, helping them financially after a shareholder’s death.
You can also add Critical Illness Insurance. This pays out if a shareholder leaves the business due to critical illness (such as cancer, heart attack or stroke) as well as death.
Adding Critical Illness Cover increases the cost of Shareholder Protection. However, this is only because you’re far more likely to develop a critical illness than you are to pass away. Premiums therefore reflect the greater risk to the insurer.
Given this higher risk, many of our Shareholder Protection Insurance clients extend their policy with Critical Illness Insurance to cover more eventualities.
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The cost of Shareholder Protection depends on various personal and policy factors.
The older you are, the more Shareholder Protection Insurance costs. This reflects the increased risk of death / critical illness during the policy term.
Smokers pay more than non-smokers for most protection policies. This is because they’re more likely to become ill — and seriously ill — than non-smokers. Smokers are also more likely to die early.
Insurers use your health and any pre-existing conditions to price cover. You might therefore pay higher Life Insurance premiums if you have high blood pressure, for example.
With Critical Illness Cover, if you’ve previously had a condition such as cancer, the insurer might exclude that type of cancer if it returns instead of increasing premiums.
Most insurers charge more if you regularly participate in hazardous activities.
These could include skydiving, outdoor rock climbing, motocross, deep sea diving / caving / wreck exploration and other dangerous hobbies.
As for policy factors, the biggest influence on the price of Shareholder Protection Insurance is firstly the amount of cover you need. The higher the benefit, the higher your premiums.
Other important policy factors include:
The longer you anticipate being a shareholder and needing the cover, the higher your premiums.
This is because you’ll hold the protection to an older age and therefore face a higher chance of death / critical illness during this period.
Adding Critical Illness Cover increases your coverage considerably, paying out for common conditions such as cancer, heart attacks and strokes as well as if a shareholder dies.
However, as becoming critically ill is more likely than dying, it costs more to add it on.
Given insurers look at many factors when pricing premiums, it can be hard to pin down the exact cost of cover.
However, the table below has a rough guide to premiums which were taken from our instant online Shareholder Protection quote engine. To get these quotes, we’ve made a number of assumptions about each shareholder. For example, we’ve assumed they are:
Age | Monthly Premiums | Life Insurance Only |
|---|---|
35 Years Old | £6.02 |
45 Years Old | £12.63 |
55 Years Old | £27.62 | Life Insurance & Critical Illness Cover |
35 Years Old | £42.58 |
45 Years Old | £86.52 |
55 Years Old | £187.57 |
As you can see, the cost of £150,000 of level Life Insurance over 10 years at 55 year old is more than three times the cost for a 35 year old.
However, the price goes up when you add Critical Illness Insurance. While fairly manageable for younger individuals, reflecting the lower chances of a younger people getting critical illnesses compared to someone older, premiums rise notably as you age.
The cost of combined Life and Critical Illness Shareholder Protection for a 55 year old is therefore almost five times that of a 35 year old.
These unequal premiums are an issue if you arrange cover using the own life under business trust route.
You must equalise Shareholder Protection Insurance premiums to prevent tax complications.
This is because HMRC generally considers unequal premiums as a transfer of value or gift from the shareholder(s) paying the most to those paying the least. Surviving shareholders could therefore end up with an inheritance tax bill on this ‘gift’ if one of them passes away. Learn how to equalise Shareholder Protection premiums.
We get that valuing your company isn’t simple.
Ultimately, different industries / sectors command different values, even if underlying business metrics are similar. That can make valuing a business a bit of a headache!
However, you need to know how much your company is worth to calculate the value of each individual shareholder’s stake. It’s impossible to get insurance without this because you buy cover based on how much each shareholder’s stake in the business is worth.
When we help clients set-up their Shareholder Protection, there are usually a few parties involved.
It will often include your accountants or other business consultants who will help with the valuation.
Samantha Haffenden-Angear
Business Protection Specialist at Drewberry
As advisers, there are a few rules of thumb we use to help value your business. For example, we take a look at:
HMRC’s tax treatment of Shareholder Protection is complicated. It depends largely on how you set it up and how you pay for it.
Depending on the whether you need to include cover for taxation will impact the cost of your insurance as you will may need a larger sum assured to take account of the potential tax liability.
Whether or not Shareholder Protection Insurance premiums are a P11D benefit in kind — meaning shareholders must pay additional tax due to having cover — depends on how you arrange it.
The most common route is for the company to pay. In this case, it’s normally a P11D benefit. Each shareholder therefore must pay tax on the premiums the company pays for them.
Naturally this is another cost to bear in mind when setting up cover.
Advisers aren’t just here to fill in paperwork, such as application forms or arranging trust documents and cross option agreements. As independent insurance specialists, we’re here to help you get the best cover for the best price.
We compare Shareholder Protection Insurance quotes from across the entire UK market so you get just that.
As advisers, this is our bread and butter. It’s even more important if you add Critical Illness Insurance as coverage varies considerably between insurers.
You give so much to your business. That’s why you deserve first class service when it comes protecting it. Here’s why you should talk to us:
For fee-free business protection advice from regulated advisers, we’re here to help. We are a safe pair of hands, we spend all day every day arranging this form of cover for our clients.
Pop us a call on 02084327333 or email help@drewberry.co.uk.
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