Simply put, shareholder protection is a type of business insurance that provides life and (at extra cost) critical illness cover. This type of cover provides shareholders with the necessary funds to purchase company shares from each other if one of the shareholders was to die or be unable to work due to terminal or critical illness.
We would always encourage a conversation between one of our financial advisors and business owners, not just for protection needs but also to consider whether there are any wider financial planning opportunities.
What are the benefits of Shareholder Protection Insurance?
- Without a shareholder protection policy and relevant agreement in place, if a shareholder dies their shares in a company would form part of their estate and could be inherited by an unwelcomed beneficiary or end up being sold to a rival business.
- Having the correct shareholder protection set up in place will create certainty and ensure smooth transition when shares are passed on, keeping business disruption to a minimum.
- The shareholder’s beneficiaries have certainty and clarity about the amount they will receive in money for the company shares when they are bought by other shareholders.
- Smaller firms might struggle to raise the capital needed to purchase the shares at short notice without an insurance policy in place.
According to a recent survey by Legal and General Insurance, 37% of businesses do not have shareholder protection cover in place.
How do I value my Company?
Like any life insurance policy, we will help you work out the amount of cover needed. Speaking to your accountants and/or fellow shareholders should make it quite easy for us to accurately value your business and therefore the amount of cover needed to purchase the equity stake of the insured shareholder.
How does it work?
Again, similar to a normal life insurance policy we would need personal information along with health and lifestyle type information to allow the insurer to calculate the cost of the premiums. As we are completely independent and have access to the whole of the insurance market, we can source a variety of quotes and compare the most appropriate level of cover and cost.
Where there are only two shareholders in a business, each shareholder will take out a policy on the life of the other shareholder and pay for the premiums themselves. This ensures that the insurance pay-out is tax exempt.
Cross Option Agreement
This type of agreement will be arranged and will sit alongside the shareholder protection policy. The cross-option agreement will set out who will buy the shares and at what price in the event of the death or critical illness of a shareholder. These agreements give certainty to the remaining shareholders and the beneficiaries of a deceased shareholder and make the transition as easy as possible.
This brief guide was written by Craig Croft-Rayner, an independent financial advisor at Milestone Financial Planning. It is a for guidance only and is not in of itself financial advice. To find out more, please get in touch for a consultation at no cost.