How do I value my company for Shareholder Protection?

Valuing a company for any reason, including Shareholder Protection, can be tricky and will very much depend on a variety of different factors. There’s no tried and tested method of valuing a business, as each business is different even within the same industry. However, some of the common factors an adviser will look at when helping you value your business for Shareholder Protection Insurance include: Analysis of the company’s cashflow Analysis of the company’s profits, i.e. whether they’re static or increasing For companies with a solid, longstanding financial history, multiples of net profit plus cash in bank and assets can be a good method of valuing the business, but this is tricky for startups and newer companies Different industries will often command different values, even if underlying business metrics are similar Intangible factors will also play a part, such as the company’s reputation and relationship with clients.

What happens with no Shareholder Protection?

If a director or business partner dies, then without initial planning and consideration the surviving directors could run the risk of the shares passing to someone with no interest in the company or even being sold to a competitor. A protection policy taken out on the relevant shareholder could ensure the surviving business owners have both the right and the financial means to buy the absent partner’s share of the business from his or her estate (or the shareholder themselves, if they’re critically ill). In the event of death, 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.

Is Shareholder Protection Insurance tax deductible?

In most cases the individual shareholder will be liable for income tax and National Insurance on the value of the premiums which are being paid. Should a claim arise the lump sum payment is usually paid out tax-free so there is no need to gross up the level of cover.

What is a cross option agreement?

A Cross-Option Agreement is set-up alongside Shareholder Protection which on death provides the option for the other shareholders to buy the shares (‘Call’ option) and the option for the deceased’s family to sell (‘Put’ Option). Should the shareholder suffer a serious illness only a ‘Put’ option exists, giving the shareholder who has suffered the critical illness the option to sell their 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. It’s essential that the company’s articles of association give both parties the option to buy / sell the shares rather than an obligation. An obligation to sell the shares could result in an inheritance tax bill as this may disqualify the shares from business property relief (BPR). There are two types of option agreements you would use for Shareholder Protection. Double Option Agreement Also known as a cross option agreement, whereby the outgoing and remaining shareholders both have the option to buy / sell but where one party wishes the sale to go ahead the other must comply. Single Option Agreement This is used when Critical Illness Cover is included in the policy. It still gives the insured (i.e. critically ill) shareholder the option to sell their shares but doesn’t give the remaining shareholders the automatic right to buy the shares. This protects the critically ill shareholder from being forced out of the business during their absence.

Shareholder Protection Insurance

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In this guide:

What Does It Cover?
Do We Need It?
Cost and Taxation
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By Tom Conner BSc MPhil

Shareholder Protection Insurance protects a business and its shareholders by making succession planning as smooth as possible should a company shareholder die or become critically ill.

It provides the necessary capital for the remaining shareholder(s) to buy the deceased’s share of the business.
The business can continue trading as normal whilst the deceased shareholder’s family can realise the value of their business interest.
More than half of businesses had no formal agreement to establish what would happen if a business owner died (Legal & General)

What Does Shareholder Protection Cover?

Should a shareholder die or suffer a terminal illness (diagnosed with less than 12 months to live) a shareholder protection policy would pay out a lump sum to the other shareholder(s).

Adding Critical Illness Cover

Adding Critical Illness Cover enables the plan to pay out if the shareholder were to suffer a serious illness, the three most common claims are for:

Cancer
Heart attack
Stroke.

In addition to the ‘big three’ conditions, Critical Illness Insurance covers typically anywhere between around 10 to more than 100 serious illnesses including conditions such as Multiple Sclerosis and Motor Neurone Disease.

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Why Shareholder Protection Insurance?

According to research from Legal & General…

53% of businesses would cease trading in under a year if a key person died or became critically ill
Over half of businesses had no formal agreement to establish what would happen in the event of the death or critical illness of a business owner
60% of businesses had not reviewed their company agreements in the last year.

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 take over 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.

Losing control of the business

If a member of the family takes over the deceased’s position as a business shareholder there is no guarantee that they will be able to make any contribution to the business. In fact, in some cases their presence could even be detrimental to the company.

Sleeping partner

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 if it turns out they’re in a position where they have no effective control over the profits of a business which they may be relying on for income.

Selling to an unwelcome party

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.

Life Expectancy CalculatorA bit morbid we know, but this tool works out the risk of you passing away based on ONS Life Expectancy Data

How Much Does Shareholder Protection Cost?

The below table details the monthly cost of Shareholders Insurance split into Life Insurance and Life Insurance with Critical Illness Cover for a healthy non-smoking individual aged 35, 45 and 55.

They’re looking for £150,000 of level cover (i.e. cover that will remain fixed throughout the policy term).

Age	5 Year Policy	10 Year Policy	15 Year Policy
Cost of Shareholder Protection Life Insurance
Age 35	£6.21	£7.10	£7.88
Age 45	£10.51	£12.66	£13.73
Age 55	£21.40	£26.78	£33.55
Cost of Shareholder Protection Life & Critical Illness Cover
Age 35	£27.51	£32.56	£35.89
Age 45	£59.38	£72.21	£81.25
Age 55	£130.40	£158.57	£179.15

Premiums correct as of February 8th, 2019

How is Shareholder Protection Insurance Taxed?

The taxation of Shareholder Protection Insurance depends on a variety of factors. Premiums and the payout may be subject to a range of taxes depending on the individual circumstances of you and your company, so it’s always best to seek specialist advice.

Where the individual pays the premiums themselves the premiums are paid from post-tax income and no tax relief is usually available. The benefit is written into trust for the benefit of the other shareholders, and in the most part protecting the payout from inheritance tax.

As always when it comes to trusts and tax law, it’s best to consult with your solicitor and accountant before putting anything in place that may open you up to a tax liability later on.

Taxation of a own life policy under a business trust…

Where the company pays the premiums on behalf of the shareholder on an own life basis which is set-up under business trust, the company is typically able to deduct this payment as a business expense for corporation tax purposes.

However, the shareholders would have to pay tax on the premiums, as these would be a P11D or benefit in kind.

Taxation of a company share purchase arrangement…

Where the premiums are paid under a company share purchase arrangement, these premiums are not typically considered a business expense as they wouldn’t meet the ‘wholly and exclusively for the purposes of trade’ rule, given that the policy isn’t designed to meet loss of profits when the outgoing shareholder dies or becomes critically ill.

As the company owns the policy and makes the policy payments, as well as receives the benefits, there aren’t usually tax implications for the shareholders.

Common Shareholder Protection Questions

Best Shareholder Protection Insurance Providers 2020

Aegon

Aegon was founded as Scottish Equitable in 1831. Dutch insurer Aegon N.V. bought a 40% stake in Scottish Equitable in 1994 and became a 100% stakeholder in 1998.

Maximum entry age: 83 for Life only / 74 for Life and Critical Illness Cover
Minimum term: 1 year for Life only / 5 years for Life and Critical Illness Cover
Maximum term: 50 years
Maximum cover: No maximum
Critical illnesses covered: 43, plus 15 additional critical illnesses

AIG

AIG Life is the UK arm of US insurance giant American International Group Inc. The insurer got its foothold in the UK protection market when it acquired Ageas Protect in 2014.

Maximum entry age: 83 for Life only / 74 for Life and Critical Illness Cover
Minimum term: 1 year for Life only / 5 years for Life and Critical Illness Cover
Maximum term: 50 years
Maximum cover: No maximum
Critical illnesses covered: 43, plus 15 additional critical illnesses

Aviva

Aviva was formed out of the Norwich Union-CGU PLC merger in 2000, but the company can trace its roots back to the 17th century.

Maximum entry age: 86 for Life only / 75 for Life and Critical Illness Cover
Minimum term: 3 years
Maximum term: 70 years for Life only / 50 years for Critical Illness Cover
Maximum cover: No maximum
Critical illnesses covered: 41, plus 10 additional critical illnesses

Legal & General

Legal & General was founded in 1836 and has since grown to become an international provider of insurance, pension and investment products.

Maximum entry age: 77 for Increasing Life Insurance / 67 for Life and CIC and Increasing Life and CIC / 74 for Decreasing Life / 64 for Decreasing Life and CIC
Minimum term: 1 year for Life / 2 years for Increasing Life Insurance and CIC / 5 years or Decreasing Life and CIC
Maximum term: 50 years for Life only / 40 years with added Critical Illness Cover
Maximum cover: Unlimited
Critical illnesses covered: 39, plus 2 additional critical illnesses

Liverpool Victoria

Liverpool Victoria has traded as LV= since May 2007. It is one of the largest insurers in the UK with more than 5 million customers across the country.

Maximum age for Life Cover: 84
Maximum age for Critical Illness Cover: 69
Maximum policy term: 45 years (40 years when CIC is added)
Minimum policy term: 5 years
Illnesses covered: 44 (plus lower payout for 20 ‘additional’ serious illnesses)

Royal London

Royal London began as a friendly society in 1861, later changing to a mutual society in 1908. Today, Royal London is now the UK’s largest mutual life, pensions and investment company.

Maximum entry age: 88 for Life Cover / 69 for Critical Illness Cover
Minimum term: 1 year for Life / 5 years for Critical Illness Cover
Maximum term: 72 years for Life only / 50 years with added Critical Illness Cover
Maximum cover: No maximum for Life / £3 million for Level Critical Illness Cover / £1.2 million for Increasing Life and Critical Illness Cover
Critical illnesses covered: 46, plus 14 additional critical illnesses

Scottish Widows

Maximum entry age: 79 for Life Cover / 64 for Critical Illness Cover
Minimum term: 1 year for level cover / 3 years for decreasing cover
Maximum term: 72 years for Life only / 52 years with added Critical Illness Cover
Maximum cover: £25m for Life / £5 million for Level Critical Illness Cover
Critical illnesses covered: 49, plus 8 additional critical illnesses

Vitality

Vitality is owned by South African insurer Discovery Holdings. Discovery entered the UK market in 2007 via a joint venture with PruHealth and PruProtect, part of the Prudential Group.

Maximum entry age: 75 for Life Cover / 60 for Serious Illness Cover
Minimum term: 1 year for Life
Maximum term: 70 years for Life / 50 years with added Serious Illness Cover
Maximum cover: £20 million for Life / £3 million for Serious Illness Cover
Serious illnesses covered: Up to 174

Zurich

Maximum entry age: 83 for Life Cover / 69 for Critical Illness Cover
Minimum term:1 year for Life / 5 years for Critical Illness Cover
Maximum term: 50 years for Life only / 40 years with added Critical Illness Cover
Maximum cover:Unlimited
Critical illnesses covered: 40, plus 2 additional critical illnesses

Get Shareholder Protection Insurance Quotes & 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.

We have a team of business protection experts who are on hand to make sure you cover is set-up correctly with the most competitive terms.

Why Speak to Us?

We started Drewberry because we were tired of being treated like a number and not getting the service we all deserve when it comes to things as important as protecting our health and our finances. Below are just a few reasons why it makes sense to talk to us.

There is no fee for our service
We are independent and impartial
Drewberry isn’t tied to any insurance company, so we can provide completely impartial advice to make sure you get the most appropriate policy based solely on your needs.
We’ve got bargaining power on our side
This allows us to negotiate better premiums for you than you going direct yourself.
You’ll speak to a dedicated expert from start to finish
You will speak to a named expert with a direct telephone and email. No more automated machines and no more being sent from pillar to post – you’ll have someone to speak to who knows you.
Benefit from our 5-star service
We pride ourselves on providing a 5-star service, as can be seen from our 2579 and growing independent client reviews rating us at 4.91 / 5.
Benefit from the protection of regulated advice
You are protected. Where we provide a regulated advice service we are responsible for the policy we set-up for you. Doing it yourself or going direct to an insurer won’t provide this protection, so you won’t benefit from these securities.
Claims support when you need it the most
You have support should you need to make a claim. The most important thing when it comes to insurance is that claims are paid and quickly. We are here to support you during the claims process and make sure it’s as smooth and stress free as possible.

Like all Business Protection, Shareholder Protection is a complicated area that requires specialist advice.

If you need any help please don’t hesitate to pop us a call on 02074425880 today or email on help@drewberry.co.uk.

Tom Conner
Director at Drewberry

Martyn Coates from Drewberry provided an excellent service with prompt handling of any question that we asked him. I would highly recommend Drewberry for anyone wanting Insurance.

Kevin Eaton

02/12/2019

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