10 min Read
02 Jul 2018

Written by Marc

Marc Shoffman is a leading finance journalist who specialises in personal finance, property and small business.

More about Marc

What is shareholder protection insurance? – complete guide on the benefits and costs

What is shareholder protection insuranceThere 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 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 for your business succession even at the toughest times.

What is shareholder protection insurance?

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 made with the policy 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 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.

How does shareholder protection cover work?

Shareholder protection insurance provides a 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 so can provide protection if a shareholder has an eligible condition which means they can no longer work.

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 know 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.

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 done 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 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.

We have vetted the services of a specialist insurance broker, which also highly rated by their customers (scoring 4.9 out of 5 on reviews.co.uk), that have specialist advisers that deal with shareholder protection policies and cross option agreements. It is free to chat and there is no obligation on your part to take matters further.

Looking for a financial adviser near you?

Do you need financial advice? An independent financial adviser can show you how to make the most of your money.

Simply find your nearest qualified and regulated adviser using the UK’s largest adviser search.