What is Shareholder Protection Insurance?
If a shareholder in a business dies, Shareholder Protection kicks in to make the succession planning process within a company as smooth as possible.
A Shareholder Protection policy provides the capital for the remaining shareholder(s) to buy the deceased’s shares.
The deceased shareholder’s family can realise the value of their business interest whilst ensuring business continuity.
58% of businesses had no formal agreement to establish what would happen if a business owner died. L&G 2011
Speak to our expert independent advisers and get quotes from all of the UK’s leading business protection insurers.
What does Shareholder Insurance cover?
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 to the other shareholder(s).
That shareholder or their family can then be bought out.
Do we need Shareholder Protection?
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 passing away?
Based on ONS life expectancy data (2008-10), the chances of someone passing away within the next 10 years are as follows:
30 years old
40 years old
50 years old
1 in 112
1 in 53
1 in 23
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:
We will talk you through the options available and capture vital information about the person(s) to be covered.
We go out to all leading business protection insurers to gain the most competitive quotes.
We email you a short report with our product and insurer recommendations for the various options we’ve discussed. When you are happy to go ahead in many cases we are able to complete the application for you over the phone.
They were patient, thorough and good value for money. I regret not using them before and I will use them again in the future.Edward Brampton
What is shareholder protection?
Shareholder Protection is an insurance policy that pays out should one of a group of shareholders become critically ill or pass away. It allows the remaining shareholders to buy back the shares of the absent shareholder providing you have the appropriate legal arrangements in place to facilitate this.
Shareholders therefore get to keep control of the company, while the family of the deceased (or the shareholder themselves, if they’re critically ill) is able to monetise the value in the shares.
This capital can be used as they see fit to cope with their new situation.
No Shareholder Protection?
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.
Why protect the shares of a director
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
- A member of the family could takeover the deceased’s position as a partner.
- The family could realise the value of the business interest by selling it.
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.
How does director protection insurance work?
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.
- 95% of businesses had at least one key individual.
- 43% of businesses had unprotected corporate debt.
- 38% of business owners expected their business to fold within 18 months of the death or critical illness of a key person.
- 33% of businesses had no form of share protection.
- 58% of businesses had no formal agreement to establish what would happen in the event of the death or critical illness of a business owner.
- 70% of businesses had not reviewed their company agreements in the last year.
Taxation of shareholder protection
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 subject 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.
Business protection trusts
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 0208 432 7333 or email us at email@example.com
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