Why is a cross option agreement required for business protection insurance?

I am researching shareholder protection and wanted to know the purpose of a cross-option agreement and what this means for my business.

Question asked by Luke Drake
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Answered by Tom Conner

cross option agreement can also be known as the double option or put and call agreement and it is clear to see why.

Do I need a cross-option agreement for Key Person Insurance?

As the preferred vehicle for shareholder protection insurance the cross option agreement provides the surviving shareholders with the option to buy the deceased business owners share of the business.

In addition to the surviving shareholders being able to call their option to buy the shares, the legal representatives of the deceased’s estate also have the option to sell the shares of the deceased business owner to the remaining shareholders.

In either case, whether the remaining business owners want to buy the shares or the legal representatives want to sell, the agreement ensures the option is exercised.

The cross option agreement is set up in this manner to ensure there is no binding sale, i.e. in certain circumstance neither party could exercise their option which means business property relief for inheritance tax purposes can be preserved.

A cross-option agreement is an important part of shareholder protection

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.

Sam Barr-Worsfold, Business Protection Expert at Drewberry, offers valuable information and advice regarding Shareholder Protection Insurance.

 A cross-option agreement is the backbone to any Shareholder Protection policy, so it needs to be set up correctly. Putting together a cross-option agreement can be complicated, but fortunately Drewberry has a team of business protection experts on hand to help. You can call us any time for advice on Key Person Insurance and cross option agreements – we’re available on 02084327333.

Sam Barr-Worsfold
Business Protection Expert

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shareholder protection
 
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This information does not constitute financial or other professional advice. You should consult your professional adviser or contact us directly on 02084327333 should you require financial advice. It is important to ensure any insurance policy you take out is suitable for your needs.
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