Shareholder Protection Insurance

Are you considering shareholder protection insurance?

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If your fellow company shareholder or co-director died or became critically ill, how would you feel if your deceased partners spouse, or one of their children, took over their share of the business, or worse still, sold it to a competitor? How would this affect your ability to run the company in profitable way?

Shareholder protection insurance or partnership protection insurance protects each of the shareholders, paying out a lump sum equivalent to the value of their stake in the business, in the event of either death or earlier critical illness. This lump sum allows the remaining shareholders to purchase the shares from the deceased shareholders family to retain control of the company.

Shareholder Protection Insurance

The business partners have a shareholders' agreement in place but we needed the security of knowing that the company could survive the loss of one of us

Do I need shareholder protection insurance?

If you are the co-owner of a company or limited partnership and you hold a share of the business, if you or one of your fellow shareholders dies or becomes terminally ill, there is a reasonable chance that their share of the company will pass to their next of kin. The impact of this situation should not be overlooked, as the knock-on effect might be that the deceased's family might become involved in the running of the business, or even take a controlling share.

If you wish to avoid this situation, researching the benefits of shareholder protection insurance would be worthwhile. A life insurance policy which, if the appropriate cross option agreement or double option agreement has been agreed and signed by all the business's owners, will pay an agreed amount to the deceased's next of kin in lieu of their taking up the company shares bequeathed by the deceased company director.

What is a double option agreement?

Also known as a 'cross-option agreement', a double option agreement is a formalised arrangement between a company's owners and shareholders so that, in the event that one of them dies or becomes terminally ill, the surviving shareholders have the option to require the deceased's next of kin to sell the deceased's shares back to the surviving company directors. Equally, the next of kin of the deceased shareholder has a similar right to require the surviving company directors to buy the deceased shareholder's share of the business. These options are mutually enforceable, so that if either party exercises their respective option, the other party to the agreement should comply.

By way of an appropriate business trust and an option agreement (a 'Company will', in effect) both the deceased shareholders family and the remaining shareholders have the option to sell/purchase the shares within a set timeframe. Arranging appropriate shareholder protection insurance ensures that the shareholder’s family receive their part of the inheritance as quickly as possible whilst minimizing disruption to the company.

What are the advantages of shareholder protection insurance?

Some of the main benefits of having shareholder protection insurance in place include:

  • You reduce the impact upon the business of losing a shareholder
  • You avoid the potential for some of the company's shares passing to an unknown and/or uninterested beneficiary
  • You avoid the potential cost to the business of buying back the company's shares
  • Everybody knows where they stand, ahead of the possible death of a company's shareholder
  • The transfer of shares can be carried out with the minimum of interruption to the business
  • The shareholder protection insurance premiums can be paid by the business, rather than by individual shareholders
  • There are significant tax advantages of placing the shareholder protection insurance arrangement in trust

Frequently asked questions

How much shareholder protection cover does my company need?

This is a calculation that the company's shareholders will need to agree when the shareholder protection insurance policy is being discussed. The sum insured, the amount that the insurance policy will pay out in the event of a shareholder's death, is likely to be based around the cost of buying back the shares from the deceased's estate. This might be equivalent to the percentage shareholding in the busines of each shareholder, based upon the agreed valuation of the overall business.

It is recommended that the sum insured is reviewed frequently to make sure that the insurance policy covers the cost of buying back the shares. As the company's turnover and profits change, so the sum insured should reflect these changes. Another way of achieving a similar effect is for the sum insured under the policy to be index-linked, so that it rises each year in line with inflation.

How much is shareholder protection?

As with any life insurance policy, there are a range of factors that need to be taken into account before a premium can be quoted. Each shareholder will be assessed individually and a premium will be based upon his or her personal circumstances.

In general however, the main factors affecting the cost of shareholder protection insurance include:

  • Your age
  • Your occupation
  • Your height, weight and BMI
  • Your medical history, including any pre-existing health conditions
  • Your current state of health, including any planned operations or procedures
  • Your exposure to any extreme sports or pastimes
  • The required sum insured under the shareholder protection insurance policy
  • Your alcohol consumption
  • Whether you are a smoker
  • Whether there is a family health history of any particular condition
  • Whether you use recreational drugs

Will I need to have a medical for shareholder protection insurance?

The majority of people who apply for life insurance are not required to have a medical. While all life insurance applications are considered on their individual merits, in some circumstances, for example a high sum insured policy, you might be required to have a medical examination.

This procedure does not necessarily mean that your application for shareholder protection insurance will be rejected.

It is also important, when completing the application form for shareholder protection insurance, that you provide full details of any and all aspects of your health record. However minor the illness or condition, you should put details on the application form.

What other benefits are available to me as a company director or shareholder?

A lot will depend upon your individual circumstances, but among the financial benefits available to you as a company director are:

How do I get a quote for shareholder protection insurance?

When you click the 'GET A QUOTE' button, completing the online form will send your contact details to an independent financial advisor, who is authorised and regulated by the FCA. He will contact you by phone and/or email to discuss your application in more detail.

If you wish to proceed with an application for shareholder protection insurance, he will guide you through the initial steps without cost or obligation.

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