Shareholder Protection Insurance

How to find the right shareholder protection insurance policy for your company
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Introduction to Shareholder Protection Insurance

A shareholder protection plan can provide your business with a vital safety net if it was ever to lose a shareholder through serious illness, injury or death. This is a scenario that nobody likes to think about, but it is important to plan ahead for regardless.

In this guide, you’ll learn how a shareholder protection agreement works, how to set one up and where to turn for professional advice about these products.

The following topics are covered below…

What is shareholder protection insurance?

Shareholder protection cover is a type of business protection insurance that provides shareholders with the necessary funds to buy shares from each other if one of them was to die or was unable to work due to a serious illness or accident. Most policies are life insurance-based but critical illness cover can also be included as an optional extra.

How does it work?

The sum insured is usually based on the amount of capital the remaining partners would need to buy out their outgoing colleague’s equity in the company. The amount the business would need to pay in premiums depends on the level of risk the insurer thinks they are taking on by providing the cover. This is calculated based on the insured person’s age, lifestyle and whether they have any pre-existing health conditions.

For example, shareholder protection for somebody in their 30s with a clean bill of health who doesn’t smoke would likely cost a business less in premiums than the same policy for somebody in their 60s who smokes and has a history of heart disease.

Cost will also increase if you decide to include any extras, such as critical illness cover.

Shareholder protection policies pay out a lump sum upon the death of the insured person, if they’re diagnosed with a terminal illness and given 12 months to live, or contract a critical illness or injury (that’s covered by the policy) and are forced to leave work as a result.

Do group income protection plans pay out lump sum settlements?

In some circumstances a lump sum settlement can be a more appropriate way to pay the benefit. While most group income protection policies are designed to pay out a monthly benefit for the duration that an employee is unable to work, many group income protection policies allow for lump sum settlements to be paid where it makes sense.

If the income protection policy has an option to pay a settlement as a lump sum, and it’s appropriate to do so, it’s likely to fall outside the terms of a standard policy and will need additional discussion and negotiation to execute.

Lump sum settlements will generally be considered and negotiated on a case by case basis, so it’s not something you should automatically expect as an option if you’re making a claim.

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Shareholder protection rules

Businesses that take out a shareholder protection insurance policy in the UK typically need to agree to the following rules and regulations…

  • Provide honest and accurate information about the insured person; this includes lifestyle and health details
  • Inform the policy provider if any of these details change
  • When an individual pays the premiums it must come from taxed income
  • If the company is paying the premiums it can be declared as a business expense, but the insured individual will need to pay income tax as the recipient of a benefit in kind
  • Some policies must be set up with a cross option (or double option) agreement. This enables the remaining partners to buy the shares and sets out how much the insured person’s beneficiaries will receive in the event of their death
  • Where multiple shareholders are involved, all benefits and costs must be shared equally across all parties. This can be done via premium equalisation

In addition to these general rules, some shareholder protection insurance providers will have their own terms, conditions and clauses you’ll need to agree to, so be sure to check the small print of your policy, and don’t hesitate to make an enquiry if you need bespoke advice.

The benefits of shareholder protection insurance

The main reason to take out shareholder protection insurance is because it can help your business out during a difficult time. The loss of a fellow shareholder through death or illness can throw a company into uncertainty, especially if it was to happen unexpectedly.

Here are some of the main reasons you should take out a policy…

  • If a shareholder dies without a policy in place their stake in the business could be inherited by an unwelcome beneficiary or end up being sold to a rival
  • Businesses don’t need to save up capital or dip into their savings for funds to purchase an outgoing shareholder’s stake in the firm
  • Having a policy in place can help ensure a smooth transition when shares are changing hands. This can help keep business disruption to a minimum
  • The insured person’s beneficiaries have clarity over the amount they will receive for the company shares when they are bought out by the other shareholders
  • For small businesses, shareholder protection can be vital since many smaller firms might struggle to raise buy-out capital at short notice

The above is intended as a snapshot of the benefits of shareholder protection insurance. To learn about the advantages bespoke to your business, make an enquiry.

The experts we work with can explain exactly how shareholder protection insurance could specifically benefit your firm.

How should shareholder protection be set up?

First you will need to work out the level of cover needed. Speaking to your firm’s accountant and fellow shareholders should give you a clear idea of how much capital will be needed to buy out the insured person’s equity if they were to die or leave the company through illness.

When applying for a policy, you will need to have the insured person’s personal information to hand. This will include their age, lifestyle and details of any pre-existing health conditions. The insurance provider will need this information to calculate your premiums, but think twice before going directly to an insurer as this will only give you access to their deals.

The market is vast and the best provider for one firm may not be right for another. Some insurers have a higher appetite for risk and the premiums they charge can reflect this. For example, one firm might hike up the rates if the insured person enjoys dangerous leisure activities such as mountain climbing, while another may be less concerned about this.

With this in mind, you should speak to a specialist shareholder protection insurance broker before you apply for a policy. The experts we work with can give you bespoke advice based on your firm’s requirements and search the entire market for the product that’s the best fit.

Make an enquiry and we’ll match you with an expert for a free, no-obligation chat today.

What terms are available?

Shareholder protection insurance terms are usually tailored to the needs of business based on how long they need cover for. If the insured person is in their 60s and only planning on working for another five years, it makes sense to agree on a term of that length.

Most insurers have the flexibility to offer cover up to a period of 40 years or more.

Who are the best shareholder protection providers?

The market leaders in the UK include Legal & General, Vitality, Royal London and Aegon but most experts would not recommend approaching one of these firms directly without seeking professional advice first. Online rates tables can give you an overview of what these providers offer, but these comparison tools are not bespoke to your business, are rarely whole-of-market and are known to give prominent placement to a handful of sponsored products.

The question of who is the best shareholder protection insurance provider is a subjective one. The right insurer for you will be the insurer that is best positioned to meet your company’s cover requirements and offer the most cost-effective premiums.

A whole-of-market insurance broker can help you find the right provider by matching your firm’s needs and requirements to an insurer’s specialty. Make an enquiry to get started.

FAQs

Here you’ll find the answers to the questions we hear most often from customers who are in the market for shareholder protection insurance.

Should I get it with or without critical illness cover?

This is a decision you should make with the needs of the business in mind and speak with an expert if you’re unsure. It will all depend on how much peace of mind you want, given that people are more likely to contract a serious illness than pass away suddenly.

Shareholder protection policies with life cover only are less expensive than plans with critical illness cover included. As a general rule of thumb, for every pound you would pay for a life-based plan, you will likely pay four pounds for one with critical illness lumped in.

It’s worth keeping in mind that premiums can rise if the person you’re insuring has any pre-existing health conditions and many insurers won’t cover certain illnesses and conditions.

Can a relevant life policy be used for shareholder protection?

No. Relevant life cover is a business protection product that companies can use to provide life insurance for their employees. Shareholders are not classed as employees. You can read more on this subject in our guide to relevant life cover and shareholder protection.

What is a cross option agreement?

A cross options agreement is an arrangement between the remaining shareholders and the insured person’s estate. It sets out who will buy the shares and at what price if the insured party was to pass away or leave the company due to serious illness.

Also known as a double option agreement, these agreements allow the surviving shareholders to decide who will buy what percentage of the equity and gives the insured’s beneficiaries the peace of mind that comes with knowing exactly how much it will sell for.

Can I set up an automatic accrual arrangement?

No. Automatic accrual does not apply to shareholder protection insurance. It’s a method of business protection that’s limited to partnerships and can’t be used by shareholders.

What is a life of another plan?

This is a type of shareholder protection commonly found when there are only two shareholders in the business. Each one takes out a life insurance policy on the other for the amount they’d need to buy out the equity, and they pay the premiums individually.

This can be beneficial as it means the payouts are tax exempt.

What is meant by the term ‘sum assured’?

This is the amount a shareholder protection policy pays out. You agree this with the insurance provider during the application process.

The amount you agree should be enough to help you purchase the insured person’s shares.

Are there policies for limited liability partnerships?

Yes. You can take out shareholder protection insurance if your business is a limited liability partnership (LLP) and the products available wouldn’t really be any different to any other types of company that are eligible. Applying through an insurance broker can help you find a policy that’s tailored to the specific needs for your limited liability partnership and ensure you don’t end up overpaying for cover.

What about company directors?

Yes, and again, there aren’t really any specifics to take note of if you’re applying as a company director compared to any other type of shareholder.

For bespoke advice about your policy, make an enquiry and we’ll match you with an insurance broker who specialises in company directors.

Should a small business take out shareholder protection?

Most experts will tell you that it’s more important for small businesses to have it than for larger operations. This is because they’d usually be less equipped to raise the money to buy out an outgoing shareholder at short notice.

Find out what other types of cover your firm could benefit from in our guide to protection insurance for small businesses.

What is an ‘own life’ policy?

This a form of shareholder protection that involves each of the shareholders buying their own life insurance policy and placing the benefits under the trust of the business. If one of them dies, their equity will be shared among the others after they’ve bought it with the payout.

Who pays for shareholder protection?

The company would usually pay the premiums and receive the proceeds of the plan. The firm can then use these proceeds to buy shares from an outgoing shareholder.

This, however, isn’t always the case as there are several different kinds of shareholder protection agreements. With a life of another arrangement between two business partners, for example, the individuals would pay the premiums themselves.

Can I get shareholder protection in Ireland?

Yes! We can provide the same service to you if you’re in Northern Ireland. The advisors we work with have access to insurers who deal with customers across the UK.

They can help you find shareholder protection insurance solutions wherever you’re based.

Should I write a will?

Yes. All shareholders entering a protection arrangement should write a will. Protected shares will usually qualify for 100% business property relief for inheritance tax purposes.

Speak to a shareholder protection insurance broker

Finding a shareholder protection insurance policy that’s tailor-made for your business isn’t always straightforward, but help is at hand. Get in touch and we’ll introduce you to a business protection expert for a free, no-obligation chat about your firm’s requirements.

The advisors we work with have whole-of-market access and can help you find the best cover available, bespoke to your needs and circumstances. Call 0808 189 0463 or make an enquiry online and we’ll match you with an expert who handles cases like yours every day.

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