Shareholder Protection Insurance

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Share protection insurance is a type of insurance policy that is designed to protect the financial interests of a company’s shareholders in the event of the death, disability, or critical illness of another shareholder. 

Shareholder protection insurance is a valuable tool that offers peace of mind and financial security to individuals who hold shares in a company. This insurance acts as a safeguard, ensuring that the interests and investments of shareholders are protected in unforeseen circumstances such as the death or critical illness of a fellow shareholder.

By providing a financial payout to the affected shareholder’s family or business partners, shareholder protection insurance helps maintain the stability and continuity of the company.

It can benefit:

  • Business owners with co-shareholders or business partners
  • Individual shareholders (minority or majority)
  • Family members of shareholders

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What Is Share Protection Insurance?

Share protection insurance, or a share protection arrangement, will allow surviving owners to purchase a deceased owner’s share of the business from the deceased’s estate. This type of policy will ensure that the deceased owner’s beneficiaries will get cash, insead of a share of the business.

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How Does Share Protection Work?

If a business owner dies or gets diagnosed with a terminal or critical illness (with some exceptions), share protection can provide a lump sum of that owner’s share to the remaining owners.  This money should be used to buy back the deceased shareholder’s shares or to compensate the surviving shareholders for any loss they may incur.

Why Should I Consider Share Protection for My Business?

You should consider share protection for your business if you have multiple owners. If one of these owners dies with no share protection in place, then their share in the business will pass onto their beneficiaries – usually their family. 

This means that the surviving business owners could lose control of the deceased owner’s proportion of the business, or even all of it. The family will have the option to become involved in running the business, or even sell their share to a competitor.

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What Are the Benefits of Shareholder Protection Insurance?

Shareholder protection insurance helps to remedy some of the destablisation done to a business upon the loss of a valuable shareholder. Here are some of the ways that this protection can help with this:

  • Business owners can prevent the deceased’s shares from being sold to competition
  • Business owners can minimise disruption during an unstable time by knowing what will happen with the deceased’s shares
  • Each owner’s beneficiaries will have increased transparency about what will happen when each owner dies
  • There is no income tax liability on the proceeds, and if all owners take part in the share protection, there will not be any Inheritance Tax at the outset or when further premiums are paid. 

What Are Some Alternatives to Shareholder Protection Insurance?

There are other share protection arrangements available if shareholder protection insurance is not for you. For example:

  • The buy and sell agreement: In this agreement, the owners agree that when an owner retires or dies, they must sell their share to the remaining owners, who must buy. 
  • Company buyback: The shareholding directors agree that the company must buy shares on the retirement or death of any shareholder, and the company then cancels the share. The authorised share capital is then reduced by the nominal value of the cancelled shares.
  • Automatic accrual: This is used mainly by partnerships. If one partner or member dies, their share is automatically acquired by the surviving members. This requires a life policy to be set up to compensate the deceased partner’s family.
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What Is a Cross-Option Agreement?

A cross-option agreement, also known as double option agreement, is an agreement between business owners that is backed up by a policy under trust. Under this agreement, the surviving business owners have the option to require the deceased’s beneficiaries to sell the deceased’s shares, and the beneficiaries also have the option to require the surviving business owners to buy them. 

If either party takes this option, the other party must comply. This offers peace of mind to the deceased’s family, as they know that if they want to sell their inherited shares, they will always have a buyer. 

This agreement requires that each owner of the business must take out a life policy to provide a lump sum to buy their share. This policy will be written under a special trust, with each business owner as a trustee.

How Much Does Shareholder Protection Insurance Cost?

You can get an idea of this by estimating how much capital the remaining shareholder partners would need in order to buy their colleague’s share in the business. 

Shareholder protection premiums are affected by risk. The amount you will pay each month depends on factors relevant to the insured owner, which can include:

  • Their age
  • Their lifestyle and occupation
  • Their health status, medical history, and family medical history
  • Their use of cigarettes and alcohol

What Happens to Shareholder Protection Insurance if One of the Owners Leaves?

If one of the owners leaves the business, the shareholder protection agreement will no longer apply to them. The policy automatically reverts to the settlor.

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