Shareholder Protection Insurance

How Does Shareholder Protection Work?

In the event of a shareholder’s death or critical illness, a Shareholder Protection policy would pay out a cash lump sum.

The benefit amount is used to pay the beneficiaries of the deceased the share of the business they would be entitled to. This allows the remaining shareholders to maintain control of the company and protect the value of their investment.

There are a number of ways the policies can be set-up making Shareholder Protection a somewhat more complex policy which we will go into more detail below.

The amount of cover will generally be equal to the value of the shares held by the person insured. This can be tricky to calculate, but we’ll go into more detail on this later.

Different Types Of Shareholder Protection

Like with most insurance, there are different types of cover you can choose from when it comes to Shareholder Protection. This includes:

• Life Insurance
  Pays out in the event of death or terminal illness during the policy term. Terminal illness is typically defined as an incurable condition where life expectancy is twelve months or less
• Critical Illness Insurance
  You can add Critical Illness Cover for an additional premium. This will pay out a lump sum cash benefit if you’re diagnosed with a critical condition.

If you plan on including Critical Illness, make sure you compare providers carefully.

Look beyond the number of illnesses the policy covers and examine the definitions of these conditions. It’s these definitions that determine your ability to claim for a condition.

Samantha Haffenden-Angear
Independent Protection Specialist

Adding Critical Illness Insurance

You might decide to include Critical Illness Cover in your shareholder protection insurance policy. This provides more comprehensive cover, as it will also pay out if any of the business partners become critically ill.

The three most common critical illness claims are for:

• Cancer
• Heart attacks
• Strokes.

On top of these ‘big 3’ conditions, Critical Illness Insurance also covers anywhere between 10 to 100+ illnesses. This typically includes Parkinson’s, loss of vision or hearing, loss of limbs and motor neurone disease.

Do I Need Shareholder Protection Insurance?

52% of businesses believe that the death of an owner or key employee would have the most serious impact on their business. With this in mind, it’s important to plan for the unexpected, not doing so could leave your business vulnerable and at risk.

But how can you determine whether it’s the right type of protection for you and your business?

What’s The Risk Of Death?

As hard as it might be to think about, you first need to consider the risks of death. Especially as you’re SIX times more likely to pass away before retirement than most people think.

Being prepared helps to protect the business you’ve worked so hard to build, and protect your employees who count on their hard-earned incomes.

According to the Office of National Statistics (ONS), the risk of a healthy man passing away over the next 10 years is as follows:

We’ve used the same data to build a Life Expectancy Calculator where you can work out your own personal risk of death. We realise this can be sad to think about, but it’s important to be prepared and protect what matters to you.

What’s The Risk Of Suffering A Critical Illness?

It’s important to consider the risk of you or any other shareholders becoming critically ill as well as passing away.

• According to Cancer Research UK, around a quarter of new cancer diagnoses each year are in people aged under 60
• Research from the British Heart Foundation shows that almost 1 million people in the UK have survived a heart attack. On top of that, more than 1.2 million people in the UK have survived a stroke or transient ischaemic attack (TIA). Almost half of these people are under the age of 75.

What Happens Without Shareholder Protection Insurance?

As well as highlighting the risks, we always ask our clients to think about what would happen to their business if they didn’t have protection? Would it be able to continue successfully? How would they feel about having a new shareholder?

Without protection, the likelihood is that the shares of the affected shareholder would pass to their estate. This means it would be left to their next of kin, who could either take ownership of the deceased shareholders’ position. Or they could sell the shares.

Neither of these options guarantee business continuity. In fact, it could result in any of the following situations:

• Losing Control Of The Business
  If the shares pass to the insured person’s beneficiaries, they could keep ownership of them. In this case, there’s no guarantee they can make a contribution to the business. Their presence could even be detrimental if they don’t have the skills to run a company
• Gaining A Sleeping Partner
  Similarly, the next-of-kin or family member could become a sleeping partner. This means they don’t help to run the company, but are still entitled to a share of the profits. They may be unhappy if they have no control over a business they rely on for income
• Selling To An Unwelcome Party
  Another option is that the beneficiary could sell their shares. This may leave the surviving shareholders with an unwelcome new partner. Or, if there are no natural buyers, both the family and the company could face financial problems.

How Much Cover Do I Need?

For a Shareholder Protection policy to be effective, you need to insure your shareholder for the value of their stake in the business.

How Do You Value A Company For Shareholder Protection?

Valuing a company for any reason can be tricky. And sadly, there’s no one-size-fits-all formula to do it. Each business differs, even within the same industry. For instance, a start up will have different factors to a long-established business.

Having said that, there are a few guidelines we use with our clients to help value their business when it comes to Shareholder Protection Insurance. For example, we’ll look at:

• Your company’s cash flow
• Your company’s profits, i.e., whether they’re static or increasing
• Multiples of net profit plus cash in bank and assets (this is better for companies with a solid, longstanding financial history)
• Intangible factors, for instance, the company’s reputation and relationship with clients.

To calculate the value, we’ll also take into account the size of the share that each person holds in the business.

Ultimately, different industries and sectors often command different values. This is often the case, even if underlying company metrics are similar. As an independent insurance broker, we have in-house specialists who can provide advice in this area if you need help, so don’t hesitate to get in touch. Call us on 02084327333 or email help@drewberry.co.uk.

Level Cover

For Shareholder Protection, the benefit will typically be Level Life Insurance. This means the sum assured remains fixed throughout the term of the policy. If the shareholder passes away on the first or the final day of the policy, the payout will be the same.

For example, if you were to take out a policy for 25 years with a sum assured of £500,000 and kept up to date with your premiums, your policy would pay out the full lump sum of £500,000 if you died during that term regardless of when you passed away.

With other forms of business protection, such as Business Loan Insurance, the benefit will often decrease over time. However, unlike a loan you’re repaying, you won’t expect the value of your business to go down.

How Much Does Shareholder Protection Insurance Cost?

The monthly cost of Shareholder Protection Insurance depends on your company’s cover requirements. When you take out a policy, there’ll be several options to choose that will impact the final cost.

Some of these factors relate to the type and level of cover you require. Other factors aren’t within your control and have more to do with each shareholder’s individual health.

We’ve outlined the factors that can impact cost below and provided some examples so you can see how prices can vary. All the figures show a monthly premium.

Insurance Provider

The provider you choose to place your policy will have an impact on cost. Each provider is unique and has their own different approach to risk.

To illustrate this, we’ve compared the costs of two providers. The quotes are for Shareholder Protection and assume the following:

• A healthy 35-year-old company director
• £500,000 of level cover
• A 25 year policy term
• Life cover only.

Insurance Provider
£22.53	£26.93

Shareholder Protection Insurance quotes correct as of April 2023

Level Of Cover

Your policy benefit, or sum assured, will also impact what you pay for cover. For Shareholder Protection though, this will be determined by the valuation of your company.

To give you an idea of cost, we’ve compared quotes for the same individual as before. The figures show two different levels of cover from the same provider: Liverpool Victoria.

Length Of Policy Term

The period of time you want the policy to last is another variable. The longer you have a policy in place, the greater the risk that the provider will pay out a claim. We’ve gained quotes from Legal & General on the same basis as before, showing two different periods of cover.

Including Critical Illness Cover

As insurance policies go, Critical Illness Insurance tends to cost a lot more than life insurance. This is because there’s a greater risk of suffering a non-fatal serious condition throughout our lives than there is of dying younger.

Using the same 35-year-old company director as before, we’ve provided an example of costs with and without Critical Illness Cover. Both quotes are from Aviva.

Age

As we grow older, the risk of becoming seriously ill and passing away start to increase. Because of this, taking out a policy at a younger age is often cheaper than waiting until you’re older.

To give you an idea of how the cost of Shareholder Protection can change, we’ve provided some examples below. These examples from Royal London assume a healthy non-smoker applying for £500,000 of cover for a 10-year term.

Medical History

When you apply for any kind of insurance, the provider will assess the risk of providing you with the cover you’ve asked for. You’ll need to complete a standard declaration of health and inform them of any pre-existing conditions in your medical history.

If you have suffered from a pre-existing condition, providers might ask for more information via a more in-depth interview or through a GP report. They’ll then decide whether your premiums will increase.

If your premiums don’t increase, the provider might limit the level of cover you can get. For instance, some insurers may exclude the condition from your cover completely. From our experience, we’ve seen that these decisions vary from provider to provider. What one sees as high risk another might not, so it’s important to compare providers when buying insurance.

Smoker Status

Whether you smoke is another factor that will impact the cost of your policy. With smoking, the risks of contracting several life-threatening conditions can increase.

Below, we’ve compared Shareholder Protection quotes for our 35-year-old company director, as before. The figures are based on a benefit of £500,000 and a policy term of 25 years. Both quotes are from Vitality.

Occupation

The type of work you do will also factor into the level of risk your insurance provider is accepting. The higher the risk, the greater the chance the provider will need to pay out a claim. As such, the final price you pay might change based on your occupation.

The industry you work in and the role you carry out will determine the level of risk. For instance, construction is seen as a very high risk industry. However, a shareholder may not spend much time on site, and so the risk of an incident could be very low.

This is where it’s important to research each provider carefully. Some specialise in high-risk industries and can offer more competitive rates than others.

Most online quote tools won’t consider any additional risk, such as hazardous hobbies. This means the initial quotes you receive may not reflect the final cost.

If you do take part in any of the hobbies below, we can work with providers to negotiate the best price on your behalf. Pop us a call on 02084327333 or email help@drewberry.co.uk.

Samantha Haffenden-Angear
Independent Protection Specialist

Hazardous Hobbies

Insurance underwriters will also ask about your pastimes outside of work. If you enjoy fun activities which come with an increased level of risk, this can also end up inflating your premiums.

As mentioned before, each provider has different attitudes towards risk. But in general, the following hobbies are often seen as hazardous:

• Diving
• Free style rock climbing
• Motor sports
• Bungee jumping
• Parachuting
• Private plane flying.

How Does HMRC Tax Shareholder Protection?

The way HMRC taxes Shareholder Protection Insurance depends on several factors. One of the most important is known as the “wholly and exclusively” test. This determines whether the policy is entirely for the benefit of the company. It plays a big part in how HMRC taxes premiums and the payout.

How you purchase cover will define whether HMRC taxes the premiums and/or the claim payout. There are 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. The right one for you and your company will depend on your own circumstances.

Life Of Another

Taking out cover on the Life of Another person tends to be the simplest option. Each shareholder personally pays for a policy for the life of their fellow shareholders. There are a few key things to consider about taking out cover on this basis:

• You each pay from post-tax income, so there are no tax concerns for the company
• Each individual receives the life insurance payout to buy the shares
• Generally, there is no tax for the firm to pay on the benefit.

However, this option is only really viable with up to 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 would need to hold four policies. This can quickly lead to an unmanageable number of policies.

Company Share Purchase

With this option, the company takes out a policy on the life of each shareholder. As such, the company also 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 deceased’s shares. This results in the proportionate shareholding of the remaining shareholders increasing.

In this case, the policy isn’t designed to just meet loss of profits. As such, it does not pass the ‘wholly and exclusively for the purposes of trade’ rule. So, HMRC doesn’t consider the premiums as being eligible for tax relief as a business expense.

Unlike Own-Life, with Company Share Purchase, the company both pays the premiums and receives the payout. As such, there aren’t usually tax implications for the individual shareholders.

Own Life Under Business Trust

The third option is for each shareholder to take out their own life insurance for the value of their company shares. They then write the policy into a trust. In the event of a claim, the trust pays the funds to the surviving business owners.

Tax implications depend on who is paying the premiums.

• The Company Pays
  If the company pays for the policy, the premiums can be deducted as a business expense. However, shareholders generally pay income tax on the premiums, as these are classed a P11D benefit, or a Benefit in Kind
• Each Shareholder Pays
  If the individual shareholder pays for their own cover, there are no further tax implications. This is because they pay from post-tax income, so they won’t be taxed twice.

Regardless of who pays for the policy, the provider pays the lump sum benefit into the trust. So, there’s not usually tax for the company on the payout.

Who Are The Best UK Shareholder Protection Providers 2025?

As an independent consultancy, we have access to the whole market. We work with all the leading UK insurance providers to find the most competitive terms, such as:

• Aegon
• Aviva
• Legal & General
• Liverpool Victoria
• Royal London
• Scottish Widows
• Vitality
• Zurich.

It’s important to consider each insurance provider, as they each have different values and attitudes to risk. Some are best suited for different industries and professions.

Additional Policy Benefits

Most of the top insurers also provide a number of extra benefits alongside the core policy. Popular perks tend to include:

• 24 / 7 virtual GP service
• Second medical opinion service
• Counselling and stress helpline
• Nutrition and fitness programs
• High street discounts
• Key person recruitment support
• Business legal and tax advice.

As specialist advisers, we can help to match your protection needs with the right insurer. We can also make sure you make the most of any free additional benefits on offer.

If you need help comparing providers don’t hesitate to get in touch on 02084327333 or email help@drewberry.co.uk.

Other Types Of Business Protection

As mentioned above, shareholder protection may not be the most suitable option. There are a number of other types of insurance policies that are worth considering.

As advisers, we often talk our clients through these different options. This is because, depending on their set up, they can be more appropriate. Or, if combined with shareholder protection, offer more comprehensive cover. We’ve outlined what these are below.

Key Person Insurance

Keyman Insurance, also known as key person insurance, has some similarities to Shareholder Protection. It also covers the insured person for death or serious illness, but they don’t need to be a shareholder. They could be a top salesperson or someone with a specialised skill set, for instance. The payout provides the necessary funds to maintain business continuity in their absence.

There are some important differences between Keyman Insurance and Shareholder Protection. Key person insurance is usually more appropriate for start-ups. It can also be used for companies where there is limited shareholder value. For more information, you can read about our client Bikmo, and why they chose Keyman Insurance.

Relevant Life Insurance

Relevant Life Cover is popular with company directors. Again, it provides the same kind of cover, only the payout doesn’t benefit the business. A successful claim is instead paid to the directors’ loved ones if they die.

Relevant Life Protection often provides the most cost effective premiums, too. In fact, directors can save up to 50% compared to personal life insurance premiums.

Executive Income Protection

Another popular option is Executive Income Protection. This suits directors who want to protect a proportion of their monthly income if they’re unable to work. However, there is no cash benefit for death, or a critical or terminal diagnosis.

If you take out a form of protection that includes Critical Illness Cover, you need to be aware of what’s not covered. Insurers provide very specific definitions for certain critical conditions, and you must fully meet the definition in order to claim.

Executive Income Protection can be used alongside another form of protection to provide full financial protection. For instance, you may be unable to work due to a health condition that isn’t covered by Critical Illness Insurance. The most common reasons for sickness absences are musculoskeletal issues and mental health conditions.

Compare Shareholder Protection Quotes & Get Specialist Advice

Finding the right protection arrangement for your company can be tricky. You may have multiple shareholders, each with different holdings. On top of that, there are a great deal of tax implications and personal factors that could impact the suitability of your cover.

Our specialist advisors know the market inside and out. They can carry out a thorough review, research the whole of the market, and get everything set up smoothly on your behalf. We can also use our negotiating power to get you the best possible rates.

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:

• There is no fee for our service
• We are award winning 🏆 independent insurance advisers who work with all the leading UK insurers
• You’ll speak to a dedicated specialist from start to finish
• We are very proud of the 4011 and growing independent client reviews rating us at 4.92 / 5
• Claims support when you need it most.
• We are authorised and regulated by the Financial Conduct Authority. You can find us on the financial services register here 🧐

For help and fee-free advice navigating the tricky world of business insurance, don’t hesitate to get in touch. You can chat to a business protection specialist on 02084327333 or email help@drewberry.co.uk.