Updated: April 20, 2024
Shareholder Protection Insurance
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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.
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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.
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.
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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.
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.
FAQs
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
Ask A Quick Question
We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in shareholder protection insurance. Ask us a question and we'll get the best expert to help.
Richard Angliss
Finance Expert
About the author
Richard Angliss has made a career in financial services which stretches over 40 years.
His early career was spent learning about the various financial products and applying them to prudent advice, working for one of the largest life assurance and investment firms. After that he joined the financial services arm of a very well-known firm providing independent advice to their 8 million customers.
For the last 20 years he has been involved in building software solutions that help Advisers and clients work together to achieve good financial outcomes and helping to set up three independent advisory firms. He also has written many articles for financial services publications and provided commentary for newspaper journalists.
At an early stage in his career he realised the great satisfaction that comes with being able to help people achieve their goals and protect their families. “Regulation of financial services has hugely impacted on ensuring people get appropriate advice. The issue these days is access to that advice and just as importantly regular reviews to make sure that everything stays on track”.
With the growing development of online resources such as Online Money Advisor he sees a great future for people to access advice to make their pension and investment work harder for them. Plus, of course, to ensure they have insurance products in place that will be required when unforeseen events happen.
He knows getting that balance right is crucial to prudent financial planning and the wellbeing of individuals and their families.
