Life Cover – Business

Regardless of the industry you operate in, it’s critical to ensure that you protect your business with a safety net. After all, it represents not only the livelihood of you and your family, but also that of your employees and fellow stakeholders.

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 may not have adequate funds at their disposal. This is where shareholder protection insurance comes in extremely useful.

Even though it’s widely used throughout the business world, not everyone has a thorough understanding of what it is, how it works and what the benefits are. So here’s a quick refresher guide.

What is shareholder protection insurance?

Put simply, 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
In today’s cutthroat world of business it’s crucial to underpin an enterprise with a safe and stable business plan. Deceased shareholders are a guaranteed way to shake up operations and seriously jeopardise the strength and unity of a business.  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
Although shareholders generally have an in-depth understanding of how to leverage their assets, inheriting family members often have no idea how to manage a portfolio. Most 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. Both parties apply for a policy on the life of their fellow shareholder. This should represent the value of their current shares in the business. Each shareholder pays the premium out of their own pocket to avoid tax and national insurance. Should a shareholder die, insurance is paid to the surviving policy holder who can then use the funds to purchase shares from the deceased shareholder’s family or estate. The surviving shareholder will then be the sole owner of the business. When there is a large age gap between the two directors policy prices can vary quite significantly.

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. Once established, the company takes out policies on all the shareholders. The value of the policies should match the value of each investor’s shares. As the company itself pays for the premiums, it receives any funds in the event of a shareholder death. Due to company law and tax procedures it is generally quite a complex and lengthy process, so it is usually advisable to engage corporate lawyers and tax advisers to ensure that policies are watertight and compliant.

‘Own life’ policy held under business trust
This method sees each individual shareholder take out their own policy held under a business trust. This should equal the value of their shares and can be drawn up as on a fixed term, or up until retirement. Should a shareholder die, other shareholders can then use policy pay-out funds to purchase their shares. Shares are divided equally among surviving shareholders.

From small scale two-person enterprises to multi-national corporations, shareholder protection insurance is a must have policy for any savvy 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.

Share holder protection is a complex process and we can advise you on how best to arrange this. You’ll find some useful information on Trusts here.

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