Shareholder Protection Insurance is a form of business life insurance that covers you, your business and your shareholders. It pays out a lump sum if a shareholder dies or suffers a critical illness.
This lump sum offers the necessary funds for the surviving shareholders to buy back the deceased or critically ill shareholder’s stake in the company.
More than half of businesses have no formal shareholder agreement about what would happen if a business owner died. How would your company cope?
What Does It Cover?
If a shareholder dies or suffers a terminal illness (where a doctor diagnoses them with less than 12 months to live), a Shareholder Protection policy pays out a lump sum. The surviving shareholders use this to purchase the shares of the deceased shareholder.
It makes succession planning for your company as smooth as possible, allowing the company to continue trading as normal. Meanwhile, it is a safety net for the deceased shareholder’s family members who are able to realise the value of their business interest.
What About Critical Illness Cover?
You can include Critical Illness Cover in your shareholder protection insurance policy. This will also pay out if any of the business partners becomes critically ill. The three most common claims are for:
- Cancer
- Heart attacks
- Strokes.
However, in addition to the ‘big three’ conditions, Critical Illness Insurance also covers anywhere between 10 to 100+ illnesses. This includes Parkinson’s, multiple sclerosis (MS), permanent loss of vision / hearing, loss of limbs and motor neurone disease.
To really understand the quality of the available policies we have access to a tool which compares the various critical illness definitions across the market covering both current and legacy policies.
Such tools help us to ensure you making the most informed decision when it comes to protecting you and your business.
Why Is Director Shareholder Protection Insurance Important?
Research from Legal & General shows…
- Half of businesses have no shareholder agreement on what would happen if a business owner dies or suffers a critical illness.
- 43% of limited companies have not reviewed their articles of association in the last year.
- 37% of businesses said the surviving shareholders would want to purchase the shares of an absent shareholder to keep control of the company. However, most have no clear way to fund this.
What Happens Without Shareholder Protection Insurance?
If you or one of your business partners dies without deciding what will happen to your share in the business, it will likely pass to your estate. If so, a family has two alternatives. They can take over the deceased’s position as a partner or sell the share.
As you can imagine, neither of these avenues is problem-free. Consequences include:
Losing control of the business
If family members take over the deceased’s position as shareholder, there’s no guarantee they can make a contribution to the business. Their presence could even be bad for the company if they don’t have the skills to run a business.
Gaining a sleeping partner
Similarly, the family member could become a sleeping partner who doesn’t help run the company but is entitled to a share of the profits. Also, the family member may be unhappy if they have no control over the direction of a business they rely on for income.
Selling to an unwelcome party
The family members could sell their interest, leaving the remaining partners working as minority shareholders with an unwelcome new partner. Or if there are no natural buyers, both the family and the company could face financial problems.
CLIENT SUCCESS STORY 🥳
David and Graham own Interface NRM and chose Shareholder Protection as a safety net to ensure their families, the business and their staff would be ok should something happen to them.
Full story → What About Keyman Insurance and Relevant Life Cover?
There are other forms of business insurance which might be more appropriate if there is little intrinsic value in the business and no need for director Shareholder Protection Insurance.
What Is Key Person Insurance?
Keyman insurance pays out a lump sum to the business should a key individual suffer a critical illness or die. The individual does not need to be a shareholder and the funds are used to maintain business continuity.
It is usually more appropriate for start-ups or companies where there is limited shareholder value. Read why start-up Bikmo chose Keyman Insurance here →
What Is Relevant Life Cover?
Relevant Life Insurance is popular with company directors paying out a tax free cash lump sum to their loved ones should they die.
There are savings to be had of up to 50% on personal life insurance premiums.
How Much Does Shareholder Protection Insurance Cost?
The monthly cost of Shareholder Protection Insurance depends on your needs and circumstances. There are policy factors to take into account, such as the:
- Sum assured or level of cover
- Length of the policy term
- Decision as to whether to add Critical Illness Cover.
There are also personal factors to consider. This means the cost of cover varies from shareholder to shareholder. For instance, insurers will price cover for each individual based on their:
- Age
- Medical history / state of health
- Smoker status
- Lifestyle / participation in hazardous activities.
Average Monthly Policy Premiums
In the table below, we’ve used our instant online calculator to compare Shareholder Protection Insurance quotes from the best UK insurers in the market.
Each life insurance premium is for a healthy non-smoker seeking £150,000 of level cover as a fixed payout over 10 years.
How Does HMRC Tax Shareholder Protection?
How HMRC taxes Shareholder Protection Insurance depends on several factors. One of the most important is the wholly and exclusively test. This decides whether the policy is entirely for the benefit of the firm and plays a big part in how HMRC taxes premiums and the payout.
However, HMRC may tax premiums and / or the payout — this is largely based on how you purchase cover. You have three ways to buy Shareholder Protection Insurance:
- On a life of another basis
- On a company share purchase basis
- Own life under business trust.
Each option has its own tax rules. Which one is right for you and your company depends on your circumstances.
IMPORTANT NOTICE 🧐
Tax rules are dependent on your circumstances and are subject to change. Drewberry does not offer tax advice. Take appropriate advice from your accountant and / or solicitor.
Life of Another
- The simplest option.
- Each shareholder pays for a policy personally on the life of their fellow shareholders. You each pay from post-tax income, so there’s no tax concerns for the company.
- As each individual gets the life insurance payout to purchase the shares, this generally means there’s no tax for the firm to pay on the benefit, either.
- However, it’s only really viable with no more than three shareholders. This is due to the sheer number of plans that are necessary otherwise. For instance, in a company with five shareholders, each individual requires four policies for each of the other shareholders. This can quickly lead to an unmanageable number of policies.
Own Life Under Business Trust
- Each shareholder takes out life insurance on their own life for the value of their company shares.
- They write the policy into trust for the benefit of the other shareholders.
- In the event of a claim, the trust pays the funds to the remaining shareholders.
- The most common method is for the company to pay. In this case, the company can typically deduct Shareholder Protection policy premiums as a business expense. However, shareholders generally pay income tax on the premiums, as these are a P11D / benefit in kind.
- Sometimes each shareholder pays individually for their policy. In this case, they pay from post-tax income and there isn’t usually any further income tax for the individuals.
- Regardless of who pays, as the insurer pays the lump sum benefit into a trust, there’s not usually tax for the business on the payout.
Company Share Purchase
- The company takes out a policy on the life of each shareholder. The business therefore receives the lump sum benefit in the event of a claim.
- Should a shareholder die or become critically ill, the company uses the funds to buy back and cancel the absent shareholder’s shares. This results in the proportionate shareholding of the remaining shareholders increasing.
- In this case, HMRC does not typically consider premiums a business expense. That’s because they fail the ‘wholly and exclusively for the purposes of trade’ rule as the policy isn’t designed just to meet loss of profits caused by an outgoing shareholder’s death or illness.
- However, as the company both pays the premiums and receives the payout, there aren’t usually tax implications for the individual shareholders.
How Does A Business Owner Value Their Company for Shareholder Protection?
Valuing a company for any reason, including for Shareholder Protection, can be tricky. There’s no tried and tested method of doing it. Moreover, each business differs, even within the same industry.
However, there are a few guidelines an adviser will use to help value your business when it comes to Shareholder Protection Insurance. For example, we’ll look at:
- Your company’s cashflow
- Your company’s profits, i.e. whether they’re static or increasing
- Multiples of net profit plus cash in bank and assets (better for companies with a solid, longstanding financial history)
- Intangible factors, for instance the company’s reputation and relationship with clients.
Ultimately, different industries / sectors often command different values, even if underlying business metrics are similar. As an independent insurance broker we have in-house experts who can provide advice in this area if you need help.
Is Shareholder Protection a Benefit in Kind / P11D?
Whether or not premiums are a P11D / benefit in kind for shareholders depends on how you set up the shareholder protection insurance policy. In brief:
- On a life of another basis — HMRC does not typically consider premiums a P11D benefit
- On a company share purchase basis — HMRC does not typically consider premiums a P11D benefit
- Own life under business trust — depends on whether the business pays or the individual pays, with HMRC considering it a P11D / benefit in kind where the business pays for the shareholders but not if the shareholder pays themselves.
Is Shareholder Protection Tax Deductible?
The tax position of Shareholder Protection Insurance depends on which of the three ways you choose to set it up.
In some cases premiums may be a tax deductible business expense against your corporation tax bill. This is common where the benefit passes the wholly and exclusively test, which means it’s entirely for the benefit of the business.
In this case, HMRC typically allows premiums as a business expense where the business pays for them.
However, if the benefit is not wholly and exclusively for the benefit of the business, such as where the payout benefits shareholders, HMRC usually does not consider premiums as a tax deductible business expense.
It’s a tricky area where it’s best to get expert advice.
What is a Cross Option Agreement?
You set up cross option agreements alongside Shareholder Insurance. It ensures that, if a shareholder dies, the other shareholders have the option to buy the deceased’s shares (the ‘call’ option). It also provides the option for the deceased’s family to sell (the ‘put’ option). This is also known as a double option agreement.
If a shareholder suffers a critical illness rather than passing away, only the put option exists. This gives the critically ill shareholder the option to sell their company shares to the other business owners but not the right for the business to buy the shares.
This protects a shareholder absent through illness from being forced out of the company and is also known as a single option agreement.
It’s essential that your company’s articles of association give each party the optionto buy / sell the shares, not an obligation. An obligation could result in an inheritance tax bill as it may disqualify the shares from business property relief (BPR). If in doubt, seek legal advice.
What is Shareholder Protection Premium Equalisation?
Where you choose an own life under business trust policy, you may need to equalise premiums if you and your fellow shareholders each pay the premiums yourselves.
For inheritance tax purposes this is to stop HMRC seeing unequal premiums as a ‘gift’ or ‘transfer of wealth’ to the shareholders paying the most to those paying the least. This might be, for instance, if one shareholder is notably older or has health problems and faces much higher premiums compared to younger, healthier counterparts.
If HMRC decides there has been such a gift, there could be inheritance tax implications in the event of a claim.
Who Are The Top UK Shareholder Protection Insurance Providers 2022?
As independent insurance brokers we work with all of the leading UK insurance providers. Below is a list of the major insurers we’ll get quotes from to achieve the most competitive terms:
- AEGON
- AIG
- Aviva
- Legal & General
- Liverpool Victoria
- Royal London
- Scottish Widows
- Vitality
- Zurich.
Additional Policy Benefits
Most of the top insurers now provide a number of benefits alongside the core policy. These might include:
- 24 / 7 virtual GP service
- Second medical opinion service
- Counselling and stress helpline
- Nutrition and fitness programs
- High street discounts.
Compare Shareholder Protection Quotes & Get Expert Advice
When there are multiple shareholders with different holdings and various ways of structuring the protection it can start to get complicated quite quickly.
Fortunately, as an independent insurance broker we have a team of expert shareholder protection advisers on hand to make sure your cover is set up correctly with the best terms available.
Why Speak to Us?
We started Drewberry™ because we were tired of being treated like a number.
We know that our clients give so much to their businesses. They therefore deserve first class service when it comes protecting that business and their interest in it. Here are just a few reasons why it makes sense to talk to us:
For help and fee-free advice navigating the tricky world of business protection, don’t hesitate to get in touch. You can reach us on 02074425880 or email help@drewberry.co.uk.
