There is plenty that can hit a business but one of the most serious events can be the loss of a shareholder. Many businesses rely on their owners for direction as well as the equity they provide. Without a proper plan in place, a shareholder’s equity would pass to their estate on death meaning part of the firm could be left with family members who may have no interest in the future of the company and who could decide to sell the shares to a third party.
You can provide a safety net for your firm through shareholder protection insurance, which ensures a succession plan is in place which is well funded should a part-owner pass away or no longer be able to work. Our shareholder protection guide will show you how to maintain certainty and build a secure and supported succession plan for your business even at the toughest times.
You can also speak with a business life insurance specialist* who will provide free guidance on the best options for your business's needs and budget.
1 minute summary
- Shareholder protection insurance provides funds so that the remaining company owners can purchase the equity of the deceased shareholder.
- It can ensure that a succession plan is in place, maintaining certainty for your business.
- Shareholder protection can include a critical illness element which will pay out should a company owner become seriously ill, allowing them sell their stake to others at a fair and agreed rate so the business can carry on operating.
- Speak to a business protection specialist* to see how it could benefit your business. A specialist can also advise how much cover your business needs as well as the likely cost.
What is shareholder protection insurance?
Shareholder protection protects businesses against the financial loss of a key shareholder should they die or suffer illness or injury. Dealing with the loss of a key shareholder in the business can be traumatic enough with disputes over how the company carries on. Without adequate protection and policies in place, a deceased company owner’s shares would pass to their estate, leaving it up to the family to decide what to do with their holding. This could mean family members with little experience try to change the direction of the business or they may just cash in and sell to someone with little interest in the enterprise.
At the same time, existing shareholders may want to purchase the shares but could face waiting for probate or may struggle to raise the funds. Shareholder protection insurance can help alleviate all this stress. Setting up a shareholder agreement will set out what happens if a stakeholder passes away while a shareholder protection policy provides funds so that the remaining company owners can purchase the equity of the deceased shareholder.
This provides peace of mind for all shareholders that they wouldn’t have to struggle to purchase the shares and the business can return to normality without too much disruption. It also ensures that family members of the deceased shareholder are guaranteed a sum of money at a fair and previously agreed price when the shares are purchased. Shareholder protection doesn’t just have to cover death. It can also have a critical illness element which will kick in when a company owner becomes seriously ill, letting them sell their stake to others at a fair and agreed rate so the business can carry on operating.
As well as providing funds for major stakeholders in a business, stakeholder protection alongside a stakeholder agreement also ensures minority shareholder protection as the reallocation of shares could dilute the value of those held by everyone else. A shareholder agreement arranged alongside the shareholder insurance can ensure that minority shareholders still have enough of a stake to have a say in the running of the business, which usually starts with a holding of at least 5% of equity.
What are the benefits of shareholder protection insurance?
Shareholder protection insurance provides a form of succession planning for your business. It helps avoid uncertainty should a key shareholder pass away as it will already be agreed how their holdings will be allocated. This means there is no risk of the shares being held by a disinterested family member who could end up selling to someone with a different strategy. It also means the deceased shareholder’s family have certainty that they will get an agreed sum for the shares.
The insurance also provides a sum that can be used by other shareholders to purchase the equity, meaning they don’t need to save any cash or use any of the business savings for this. Ultimately, shareholder protection insurance means a business can have a better chance of returning to normality, which is good for other owners, staff, customers and even lenders as it means the future of the firm is secured and any conflicts over ownership, which could affect performance, are avoided.
Shareholder protection also has benefits when it comes to the pension lifetime allowance. Any payout from the shareholder protection does not count towards the person's pension lifetime allowance for tax purposes. On the other hand, group life insurance payouts do form part of an individual's overall pension allowance. This may become of less concern as the government is set to abolish the pension lifetime allowance as of April 2024.
How does shareholder protection cover work?
Shareholder protection insurance provides a cash lump sum payout to either one named beneficiary or a group of beneficiaries so they can have funds to purchase the equity of a partner who passes away. Some policies also have a critical illness element to provide protection if a shareholder has an eligible medical condition. Health conditions like cancer and heart disease can be life-altering and having access to funds to give the business options to buy a shareholder out can be invaluable.
Older shareholders or those who may have health concerns could be more expensive to insure. It is important when shareholder protection is to be used to purchase shares that it can be shown that there is a fair distribution of costs and benefits across all parties. This can be done via something known as premium equalisation and there is a specific methodology to calculate how premiums are equalised. Correctly attributing costs and potential benefits under a shareholder protection arrangement will ensure that the policy premiums and benefits are not subject to inheritance tax. This is why you should speak to a Shareholder protection insurance specialist*, as well as your accountant, to ensure that any shareholder protection policy is set up correctly and placed in trust if required.
Shareholder protection tax treatment
Paying for shareholder protection through your business can save corporation tax when you put the insurance premiums through as a business expense. Often, if you save tax at the front end, you'll end up paying tax at the back end but this doesn't have to be the case if your shareholder protection is correctly arranged.
There are a number of things to consider including, whether the shares will go into the deceased shareholder's estate before they are purchased by the surviving shareholders. If the shareholder agreement stipulates that the deceased's estate must sell the shares and the other shareholders must buy them, the shares may not qualify for business property tax exemption and could increase inheritance implications. Carefully worded, the same agreement could allow for this tax exemption but still achieve the same outcome – an example of just one of the reasons why it is useful to speak to a specialist business protection adviser*.
It's unusual for the payout to be liable for capital gains tax as the share price is usually agreed and doesn't gain value between reaching the deceased estate and being bought by the surviving shareholders but it is something that should be carefully considered.
There are three main types of shareholder protection insurance.
A ‘life of another policy' gives each owner in the business their own policy, with a premium based on the usual age, health and lifestyle criteria. If one dies a payout is made from their policy to the surviving shareholder so he or she can purchase the shares. This is typically suitable when there are two business partners.
Another option is for each shareholder to have their own policy but it is written in the form of a business trust so when one dies the payout is shared among everyone equally. Alternatively, a company can buy and pay the premiums for the policy and the business then receives the payout when a shareholder dies.
As mentioned, policies should be set up with a cross-option agreement (also known as a double-option agreement) which enables the remaining directors or partners to buy the shares and sets out how much the deceased’s family will receive.
Where an individual pays the premiums of a shareholder protection insurance policy it would be paid out of taxed income. But in cases where the business pays, the premiums can be treated as an expense, but the insured individual will also be seen as taking a benefit in kind so will need to pay income tax.
How much shareholder protection insurance do you need?
This is often the trickiest question to answer. Valuing an unquoted company is difficult and so it is likely that you will need to enlist the help of your accountant.
Articles of association
The first important factor to consider when working out how much shareholder protection you need is understanding how the shareholding itself has been distributed within your company. You should check your ‘Articles of Association', a document that defines your company's purpose and sets out how tasks are accomplished. It should include the defined roles for your company directors as well as how directors are appointed and how shares have been distributed.
A majority holding is clearly more valuable than a minority holding, however, there is nothing stopping you disregarding any discounts for minority shareholding and instead valuing each shareholder as a proportion of the total value.
Calculating the value of shareholder protection insurance required
There are three accepted ways to value a private or unquoted company and they are:
- Dividend yield – Look at your past and future dividend projections as well as earnings. Also, take a look at the dividend yields of other comparable quoted companies and use that to calculate the value of your company. If a similar company to yours quotes a dividend yield of 5%, use the dividends you have paid to work out the approximate value of your business. If you had paid £25,000 in dividends and you used the dividend yield of 5% of a similar quoted company, your business would be valued at approximately £500,000. A 20% share would therefore equate to £100,000. This type of valuation is usually only useful for working out minority shareholdings.
- Profit multiples – Look at your company's performance. Take past and present performance into consideration, but also consider realistic projections of future profits. You should make adjustments for any abnormalities in the figures (known as ‘normalising adjustments') and remove any extraordinary expenses that could be viewed as being higher or lower than would be normally expected. The figure you arrive at can then be multiplied by a price/earnings ratio (also known as PER). To work out the approximate price/earnings ratio for your business, find a similar quoted business and check its price/earnings ratio. As a general rule, unquoted businesses tend to have a price/earnings ratio 50% lower than quoted companies and so you should halve the figure. So, if your business is making post-tax profits of £50,000 and a similar quoted business has a price/earnings ratio of 20, you could make the assumption that your business should be valued at around £500,000.
- Net assets – This type of valuation looks at the company's balance sheet and is simply a figure derived from total assets minus total liabilities. This type of valuation is rarely used for guidance on the value of shareholdings unless of course your business is involved in acquiring assets (such as property investment).
The best way to understand how much shareholder protection insurance you need
The best way to understand exactly how much shareholder protection insurance your business needs is to speak to a business protection specialist. Our recommended business protection specialist, LifeSearch*, will provide free advice, plus they have access to the whole market allowing you to compare the best business protection quotes from a range of insurance companies.
How much does shareholder protection insurance cost?
Similar to a life insurance product, the cost of shareholder protection will depend on the person being insured and their health, age and lifestyle. Shareholder protection providers will have a variety of rates so it is important to shop around. While some insurers provide online shareholder protection insurance calculators that help work out how much cover you may need and how to split the premiums between owners, a specialist life insurance broker* can help you find the most suitable shareholder protection policy and make sure it is set up correctly. The specialist advisers will also ensure that you're engaging your accountant and/or legal representatives so that your agreements are supported in the right way.
Buying shareholder protection when a shareholder reaches older age can be much more expensive than buying it when the shareholder is young and taking it over a longer period of time. You'll lock in the monthly premiums for the duration of the policy but you can always cancel it beforehand if you no longer need the protection offering you flexibility and cost savings.
Monthly premium for shareholder protection insurance over 20 years for a non-smoker
| Age of shareholder | Monthly premium for £100,000 death benefit – shareholder protection | Monthly premium for £100,000 death benefit with £50,000 critical illness benefit – shareholder protection |
| 30 | £5.00 | £17.59 |
| 40 | £8.46 | £31.30 |
| 50 | £18.79 | £71.73 |
| 60 | £50.13 | £126.27 |
All prices are correct as of January 2023
Monthly premium for shareholder protection insurance over 20 years for a smoker
| Age of shareholder | Monthly premium for £100,000 death benefit – shareholder protection | Monthly premium for £100,000 death benefit with £50,000 critical illness benefit – shareholder protection |
| 30 | £7.72 | £22.28 |
| 40 | £16.84 | £50.87 |
| 50 | £44.65 | £123.29 |
| 60 | £116.18 | £235.48 |
All prices are correct as of January 2023
How to find the best shareholder insurance premiums
I have personally vetted the services of LifeSearch*, a specialist insurance broker, which recommended and put in place the best shareholder protection policy for my business, Money to the Masses. LifeSearch has specialist advisers that deal with shareholder protection policies and cross-option agreements as well as other types of business insurance. It is free to arrange an initial chat, just fill in the form via the above link, and there is no obligation on your part to take matters further. In most cases, LifeSearch does not charge for the advice that the advisers provide to you, you will merely pay the premiums associated with any insurance that you decide to buy. As well as having strong ethics and expertise the firm also enjoys preferential terms from insurance companies meaning that they can guarantee to beat any shareholder protection quote.
If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. The following link can be used if you do not wish to help Money to the Masses and do not wish to qualify for the cashback referred to in the article – LifeSearch
