Introduction to
Shareholder Protection
Insurance
What is shareholder protection
insurance?
This type of Business protection
insurance provides shareholders
with funding to be able to buy
shares from an other shareholder, if
that shareholder became serious ill,
had an accident or died. These
policies are typically based on a life
insurance structure however critical
illness can be added as an additional
option.
Common reasons why businesses
would take out Shareholder
protection are:
- Having the ability to buy shares from a shareholder that dies or becomes critically ill.
- Helping the shareholders family or beneficiaries sell shares at a fair price with limited complications on the transaction.
- Provide an income to a critically
ill shareholder without the need
to return to work.
- Offering a tax efficient method
to transfer ownership of shares
following a shareholder
becoming critically ill or in the
event of a death.
How does shareholder
protection work?
The sum insured is usually based on the capital the
remaining partners would need to buy out the
shareholders equity within the company.
Shareholders or the business can take out
policies to insure the lives of each
individual shareholder, giving protection
to all. If a claim is made within the
duration of the plan a lump sum would
be paid out to allow the policy holder to
buy shares from the critically ill
shareholder or there beneficiaries. Legal
agreements are drawn up stating how the
shares would be managed in the event of
a death or a critical illness. The amount a
business would need to pay would
depend on the levels of risk the provider
thinks they are taking by providing this
protection. Calculations are based on the
age, lifestyle and whether they have a
pre-existing medical condition.
Within the UK there are usually three
types of shareholder protection which
depend on what the business needs and
also it’s size.
A “Life of another”
policy is a popular
method when assigning benefits to
somebody. This can be used when a
company is owned by two
shareholders. Each shareholder would
take out a plan which covers the life of
the other, representing the value of a
partners share in the business.
“Share purchase insurance”
enables
the business to take out a policy for all
of it’s shareholders, matching the value
of their owned shares. In this instance
rather than the individual receiving the
payout the funds will then be used by
the business to buy these shares back
retaining control.
“Own life policy”
help in a business
trust can be an alternative to a business
share purchase option involving
shareholders taking out personal
policies and holding them within a
business trust. In the event of a
shareholder passing away the
remaining shareholders would be able
to use the payout to purchase these
shares.
How shareholder protection
policies are setup?
Working out the level of cover is one of the initial steps needed when
considering shareholder protection. Talking to all the shareholders and support
from the finance director will give a clear understanding of the capital to buy out
the insured’s equity.
The application process will require all individuals personal information which consists of
age, lifestyle and information of any pre-existing medical conditions. This information will
be presented to the insurance providers to calculate premiums. To ensure the very best
cover we will request quotes from all appropriate providers. Our qualified experts will give
you advice with a recommendation for the most appropriate cover.
The majority of people are more
likely to become serious ill than
pass away suddenly. Critical illness
cover can give peace of mind.
Shareholder protection plans that only
include Life cover are usually 3 to 4 times
less expensive than with critical illness
added to the policies.
For limited liability companies
shareholders can take out protection
insurance if the company is limited liability
partnership (LLP). The products offered
would not be any different to policies available to businesses with a shareholder
structure. The majority of advice would
recommend all small businesses
to be
protected, as they are generally less
equipped to raise the capital required.
Who would normally pay for
the premiums when taking out
a shareholder protection plan?
It is generally the business that would cover the
premiums and who would receive the proceeds of the
plan. In turn the business or shareholders can then
proceed to purchase the shares from the leaving
Arranging shareholder protection can be a time consuming
process. Obtaining personal information from the
individuals being insured maybe challenging as they can
often wish to discuss this discreetly with an appointed
adviser. The process is also complicated by insurance
providers differing in the information deemed necessary.
After the application is submitted there are occasions
where it can be referred to the underwriters who may come
back with additional questions.
We would always suggest using a qualified regulated
adviser that has experience in setting up these types of
insurances. We have helped many businesses with
applications and drafting suitability reports that will explain
all costs involved and the reasons why the particular
provider has been chosen and also the costs incurred with
this protection.
Our review will not cost you or your business to get
regulated advice on share protection policies. If you decide
to proceed the chosen provider would usually pay us a set
amount which will be mapped out clearly in the terms of
business between you, the provider and us.
