Shareholder protection insurance

Company perspective: What if?

Your business is something that you have doubtless worked hard to establish but your empire could be put at a massive risk. One of the most damaging events a business can fall victim to is the death of a major stakeholder. Should a business owner die unexpectedly the event can have a serious impact on their enterprise, not to mention the shareholder’s family. When it comes to distributing shares, family members and other beneficiaries may prefer to cash them in. Meanwhile, other shareholders may wish to purchase the shares but not have adequate funds at their disposal. This is where shareholder protection insurance comes in extremely useful. In my experience, the majority of businesses that I meet either have no such cover in place or have inadequate cover. The introduction of an external investor makes this topic even more pertinent.

What is shareholder protection insurance?

Shareholder protection insurance is designed to ensure that the aftermath of a shareholder’s death is a smooth and stress-free as possible. It involves writing up a series of legal agreements that set out how shares are to be managed if a stakeholder passes away. Either the fellow shareholders or the company as a whole takes out insurance policies on the lives of each shareholder. Should a shareholder die, policy pay-outs can be used to purchase the shares of the deceased holder.

The benefits of shareholder protection insurance:

A safe and stable business plan

By taking out shareholder protection insurance, shareholders enjoy the total peace of mind that should a fellow investor pass away, surviving shareholders will not have to worry about finding the money to purchase assets. Instead, they will receive pay-out funds that allow them to buy up the deceased’s shares quickly and efficiently. This means business can return to normal as quickly as possible.

Support for family members

Shares or cash? Most beneficiaries would rather receive money as this is far more useful to them. Cash payments can also help to relieve the stress that families face when losing a key breadwinner. When taking out shareholder protection insurance, company stakeholders can rest easy that their families will receive financial compensation in the case of their death. The policies guarantee a fair buy-out price, as well as a quick, easy and stress-free process.

Illness and disability

As well as supporting fellow shareholders and family members in the case of death, shareholder protection insurance can also be used to cover serious illnesses. Given that the right agreements and policies have been put in place, a sick shareholder is able to sell shares to continuing shareholders. Should a shareholder fall ill, the knowledge that they have shareholder protection insurance will be a big weight off their minds.

The three main types of shareholder protection insurance:

In the UK, shareholder protection insurance agreements can be written in three different forms. The types of policies that shareholders and companies take out will depend on the nature of their operations, as well as their individual preferences. ‘Life of another’ policy - this method is generally adopted when a business is run by just two shareholders, with both parties applying for a policy on the life of their fellow shareholder. Company share purchase - under this method of shareholder protection insurance the company itself (as opposed to the surviving shareholders) purchases shares back from a deceased shareholder. ‘Own life’ policy held under business trust - this method sees each individual shareholder take out their own policy held under a business trust. Shareholder protection insurance is a must have policy for any company. As well as ensuring the stability and longevity of the business, policies also offer the peace of mind that fellow stakeholders and family members will be looked after if the worst happens. Albert Goodman Chartered Financial Planners can help and advise you in this important area of your business.