Shareholder Protection Insurance

Shareholder Protection Insurance

The loss of an owner can significantly impact a business’s success, not just in terms of lost profits but also regarding who will step into their role. It’s essential to consider who would take over their daily responsibilities and decision-making for the future of the company.

Imagine if one of your co-owners passed away. What would happen to their share of the business? Without a plan in place, a shareholder’s equity would transfer to their estate, which could result in your business being part-owned by someone who has no interest in its future. You might find yourself working with a family member who has no experience in the industry or could try and change the direction of a company. Most owners we advise express concerns about working with a co-owner’s spouse or children, as they may lack the necessary knowledge or interest in the business.

What is Shareholder Protection Insurance?

Shareholder Protection Insurance provides an important safety net that allows companies to plan ahead should the worst happen. It offers surviving shareholders the funds needed to buy out the shares from the estate which minimises interruption to the business whilst compensating the deceased’s family.

The main benefits are:

• Financial stability for both the business and the family • Minimises disruption to the business • Removes the need for businesses to raise funds to purchase the shares • Avoids beneficiaries with no understanding or interest in the business having control in the direction of the company- business owners can keep control of their business • Avoids shares being sold to a third party and/or even a rival • Ensures the beneficiary’s estate is protected

How does Shareholder Protection Work?

Shareholder Protection Insurance works by providing a financial safety net to ensure the smooth transfer of shares and continuity of the business in the event of a shareholder’s death or critical illness. Here’s how it generally works:

1. Policy Setup: Shareholders agree on a protection plan, often in the form of a life insurance policy or critical illness cover. Each shareholder takes out a policy on their own life, with the other shareholders or the company as the policy beneficiaries. 2. Agreement: The shareholders typically enter into a legal agreement, such as a buy-sell agreement, that outlines how shares will be handled if a shareholder dies or becomes critically ill. This agreement specifies how the shares will be valued and transferred. It is advisable that you speak with your accountant and co-shareholders to agree on the sum assured for each shareholder. 3. Premium Payments: Each shareholder pays premiums for their respective policies. The amount of cover and the premiums are determined based on the value of each shareholder’s shares and the business’s needs. At this point you will also need to decide whether you want the policy to pay out solely on death or if you want to also include Critical Illness Cover. This will also protect shareholders in the event of one being diagnosed with a critical illness (as defined in the policy) and can no longer work. 4. Payout: If a covered shareholder dies or becomes terminally ill (or suffers a critical illness if you have added Critical Illness Cover to the policy), the insurance policy pays out a lump sum to the surviving shareholders or the company, depending on the policy structure. 5. Share Transfer: The payout provides the funds necessary to buy the affected shareholder’s shares from their estate or family. This ensures that the shares are sold to existing shareholders or the company, maintaining control within the original group.

A Cross Options Share Agreement will usually be required to help ensure that the ownership of a business remains within the original group of shareholders and provides a clear, pre-arranged process for handling the sale and transfer of shares in the event of a shareholder’s death or critical illness.

How much Shareholder Protection do I need?

One method for determining the amount of shareholder protection insurance needed is to estimate the capital required by the remaining shareholders to purchase the departing shareholder’s stake in the business.

Additionally, you may consider including Critical Illness Cover in your shareholder protection policy. This coverage provides a payout if the insured person is diagnosed with a specified critical illness during the policy term. Note that this option must be added at the outset and comes with an additional cost.

When should I take out Shareholder Protection?

If you are part of a business where there are multiple shareholders and you don’t have the funds to purchase shares in the business that belong to the other shareholders outright, you should take out shareholder protection. It will help to ensure that the future of the business is in the hands of the other shareholders and not the deceased’s family.

How can Shareholder Protection benefit the deceased’s family?

The family of the shareholder who has passed away will receive a fair value for the shares and don’t need to worry about getting involved in a business that they may have no understanding of or interest in.

How can Shareholder Protection benefit the shareholder?

They can have peace of mind that both their family and their business will be taken care of in the event of their death.

In the event of them contracting a critical illness, they can force the remaining shareholders to buy their shares if desired.

How can Shareholder Protection benefit the business?

There will be minimal disruption for the business. It will ensure that no unwelcome beneficiaries will enter the business and the deceased’s shares cannot be sold to a rival meaning all remaining shareholders will retain total control of the business. In addition to this, it will ensure that there are funds readily available to buy the shares so there wouldn’t be a need to take out loans or liquidate assets to find the funds to buy the shares quickly.

Is Shareholder Protection a Legal requirement?

No, there is no legal obligation to have shareholder protection. However, it is a wise business practice to prevent equity from being held by individuals who may have little or no interest in the company’s success.

Our experts here at The Mortgage Masters offer advice on a full range of business protection policies. We can ensure you get the right kind of policy at the right level.

Get in touch and see how we can help your business to survive the loss of an irreplaceable member of the team.