While there are all kinds of disruption that can unsettle or threaten the future of a business, there is perhaps none so serious or immediate as the loss of a shareholder to long-term critical illness, or death.
As well as being a personal loss and tragedy to everyone involved, the death of a shareholder and someone so senior in a business can cause extreme uncertainty and damage not only in the immediate future, but also for the long-term.
There’s no way to mitigate the personal loss that comes with the death of a shareholder, but from a business, financial and continuity standpoint, shareholder protection insurance can help to an extent.
Shareholder protection cover provides reassurance to any business that in the event of a shareholder’s death, a payout will be available that can enable the remaining shareholders to buy back shares from a deceased shareholder’s estate, ensuring they retain control of their company.
Without this shareholder insurance in place, there’s no guarantee the funds will be available to buy back the shares, even if there is a shareholder protection agreement in place stating the shares should be sold to the remaining shareholders.
When it comes to investing in shareholder protection insurance, there are a few types you can invest in and the best one will depend largely on the type of business you have and the set up of your senior team.
In this article, Rigby Financial outlines the shareholder protection options that are available.
Shareholder protection insurance type 1 – Life of another
With a life of another policy, each individual shareholder arranges a life policy on their fellow shareholder and would be responsible for paying the premiums themselves.
In the event one of the shareholders dies, the policy would payout and the funds would go to the remaining shareholders to be used to buy back the shares.
This type of shareholder protection insurance is best used for businesses with just two shareholders as it can become complicated when working out the disbursement of the payout with the more shareholders who are added.
This type of shareholder protection doesn’t have (and can’t be used for) any tax benefits because the premiums are paid for out of taxed income.
Shareholder protection insurance type 2 – placed in a trust
It’s always advised to place shareholder protection insurance into a trust.
With this option, each shareholder has their own policy (which they pay into) and the policy is written into a trust in the name of the business.
In the event one of the shareholders dies, the payout will be made out and paid equally to the remaining shareholders so they can fund the purchase of the shares.
From a tax perspective, because the individual shareholders pay the premiums out of their taxed income, this can’t be used for any benefits relating to income or national insurance.
However, because the policy is written into a trust it can have some tax advantages when it comes to the payout.
Shareholder protection insurance type 3 – business owned insurance policy
The final option for shareholder protection insurance, is to write the policy into the name of the business and for the company to own and pay into the policy.
As the name suggests, with this option, the premiums are paid for by the business, and any payouts that are made as a result of the death of a shareholder will go to the business for the purpose of buying back any outgoing shares.
This can have some tax benefits because payments for the premiums can be treated as an allowable expense, which can make a business owned shareholder policy a more tax efficient method of investing in shareholder protection.
Setting up your shareholder protection insurance
Regardless of the type of shareholder protection you decide to invest in for your business, you’ll go through the same process and be required to submit the same details for the policies.
Typical information you’ll need to provide for your shareholder protection relates to their health and wellbeing of the shareholders who’ll be covered, so this will be information like:
- Age of the shareholders to be covered
- What’s their current lifestyle (for example are they a smoker, heavy drinker or regularly exercise etc)
- Do any shareholders have any pre-existing conditions
It’s important to remember that shareholder protection insurance is just like any other life insurance policy and that you and your fellow shareholders must provide accurate information when taking out the policy.
You should also update all information on the policy and seek advice if you’re not sure if information is relevant.
Failure to disclose any health conditions or lifestyle factors when taking out the policy could result in it becoming void and any payments refused.
Invest in the right shareholder protection insurance
Investing in the right type of shareholder protection insurance is essential to protect your business and ensure you get all the benefits you need out of the protection.
With the right type and level of shareholder protection within the business you can be confident that you’ll have the financial resources available in the event shares need to be bought back into the company as a result of the death of a shareholder.
One option could be to bring in an independent expert to ensure you and your business find the right type of protection that can give you peace of mind that should the worst happen, your business will be in a position to quickly re-establish control and some form of normality before the long-term future of the company is put in jeopardy.