business PROTECTION

Shareholder Protection

Mortgage Broker Sussex

What is Shareholder Protection?

What is shareholder protection cover?

Dealing with the loss of a key shareholder in the business can be traumatic enough with the disputes over how the company carries on. Without adequate protection and policies in place, a deceased company owner’s share would pass to their estate, leaving it up to the family to decide what to do with their holding. This could mean family members with little experience try to change the direction of the business or they may just cash in and sell to someone with little interest in the enterprise.

At the same time, existing shareholders may want to purchase the shares but could face waiting for the probate or may struggle to raise the funds. Shareholders protection insurance can help alleviate all this stress. Setting up a shareholder agreement will set out what happens if a stakeholder passes away while a shareholder protection policy provides funds so that the remaining company owners can purchase the equity of the deceased shareholder.

This provides peace of mind for all shareholders that they wouldn’t have to struggle to purchase the shares and the business can return to normality without too much disruption. It also ensures that family members of the deceased shareholder are guaranteed a sum of money at a fair and previously agreed price when the shares are purchased. Shareholder protection doesn’t just have to cover death. It can also have a critical illness element which will kick-in when a company owner becomes seriously ill, letting them sell their stake to others at a fair and agreed rate so the business can carry on operating.

What are the benefits of shareholder protection cover?

Shareholder protection insurance provides a form of succession planning for your business. It helps avoid uncertainty should a key shareholder pass away as it will already be agreed how their holdings will be allocated. This means there is no risk of the shares being held by a disinterested family member who could end up selling to someone with a different strategy. It also means the deceased shareholder’s family have certainty that they will get an agreed sum for the shares.

The insurance also provides a sum that be used by other shareholders to purchase the equity, meaning they don’t need to save any cash or use any of the business savings.

How does shareholder protection cover work?

Shareholder protection insurance provides a lump sum pay-out to either one named beneficiary or a group of beneficiaries so they can have funds to purchase the equity of a partner who passes away. Some policies also provide a critical illness element so can provide protection if a shareholder has an eligible condition which means they can no longer work.

The three main types of shareholder protection cover

A “life of another policy” gives each owner in the business their own policy, with a premium based on the usual age, health and lifestyle criteria. If one dies a pay-out is made from their policy to the surviving shareholder so he or she can purchase the shares. This is typically suitable when there are two business partners.

Another option is for each shareholder to have their own policy, but it is written in the form of a business trust so when one dies the pay-out is shared among everyone equally. Alternatively, a company can buy and pay the premiums for the policy and the business then receives the pay-out when a shareholder die’s.

As mentioned, policies should be set up with a cross option agreement (also known as a double option agreement) which enables the remaining directors or partners to buy the shares and sets out how much the deceased’s family will receive.

Speak to us today to discuss how your business could benefit from a shareholder protection policy.

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