Shareholder Protection Insurance protects your business, its shareholders and their families.
Should a shareholder die or become critically ill (if you’ve added Critical Illness Cover to your policy), it pays out. This provides the funds to allow for the business or the remaining shareholders to buy back the absent shareholder’s shares.
Moreover, it provides a willing and able buyer for the shares. This protects the shareholder / their family as it provides them with a lump sum in exchange for their shareholding.
There are three main ways to set up Shareholder Insurance:
This guide discusses life of another Shareholder Protection Insurance. Perhaps the simplest way to set up Shareholder Insurance, it is, however, only really viable where there are no more than two or potentially three shareholders.
Life of another Shareholder Protection sees each individual shareholder take out a policy on the life of their fellow shareholder(s). This means, should anything happen to the other shareholder(s), the individual who bought the policy based on that life receives the payout.
They can then use these funds to buy the absent shareholder’s shares, retaining control of the business.
Individual shareholders pay for this type of Shareholder Insurance. This is from their own personal bank account and not from company funds.
This means that the individual also receives the benefit rather than the company.
Each individual shareholder pays for the insurance personally based on the life of the other shareholder(s). This is from post-tax income, i.e. income that HMRC has already deducted all relevant taxes and national insurance contributions from.
Given this, there’s therefore usually no tax to worry about on premiums for the company. Moreover, as the individual receives the payout to buy the shares not the business, there’s also not usually tax concerns for the business on the payout, either.
Ultimately, the tax treatment of Shareholder Insurance will be subject to agreement between your adviser, accountant, legal representatives and local inspectorate of taxes.
The main disadvantage with this type of Shareholder Protection is that it’s only really viable with no more than two or potentially three shareholders.
This is because each individual shareholder has to hold a policy on the life of their fellow shareholder(s). This could quickly lead to an unwieldy and unmanageable number of policies.
For example, in a company with five shareholders, each shareholder would have to hold four policies on the lives of the other shareholders. That becomes a lot of policies to manage very quickly.
Also, a shareholder may leave the business, in which case they’d have no use for Life Insurance policies written on the lives of ex-colleagues. In such a situation you may be able to assign these policies to the departing shareholder’s replacement. However, doing so could harm the tax position of a life of another policy.
While life of another Shareholder Insurance is the simplest form of Shareholder Protection, that doesn’t mean it’s easy to arrange. Shareholder Protection is complicated, probably the most complex type of policy Drewberry assists its clients with.
Moreover, life of another Shareholder Insurance is only really a viable solution for a minority of companies (those with two or potentially three shareholders).
We recommend seeking the help of an expert adviser, such as one of the team at Drewberry, before arranging this cover. Going it alone can be a bit of a minefield — wouldn’t it make more sense to have an expert in your corner?
We started Drewberry™ because we were tired of being treated like a number.
We all deserve a first class service when it comes to things as important as protecting our finances. Below are just a few reasons why it makes sense to talk to us:
Simply pop us a call on 02084327333 or email email@example.com.