Why businesses need shareholder protection insurance

When a business partner dies there are implications for the surviving partner(s). Shareholder protection provides a safety net and helps minimise the impact on the organisation’s future operation.

The aftermath of a shareholder’s death is stressful for everyone associated with a company. There are many human emotions to deal with – let alone consider what might happen to the business!

With any sad passing, the following days are confusing and chaotic. For any business and the people employed by it, such uncertainty causes concern and panic.

The main issue in the event of the loss of a director is business instability. It’s vital that the remaining director is in control of the business following the death of a fellow shareholder.

Otherwise, the surviving partner has to run the business with non-appropriate partners – depending who has been included in the deceased’s will.

How does shareholder protection work?

As you’d expect, where people’s estates are involved, it’s vital to get all legal elements in place. Businesses often carry significant value. Surviving family members will want to recoup the full value of any holding in the business.

A series of legal agreements are created to establish how shares are to be managed when a shareholder dies.

Keeping a business in good shape is essential. Without shareholder protection the hard work that has been put in over the years is jeopardised. Shareholder protection insurance gives peace of mind.

When a business partner passes away, the surviving shareholder does not have to worry about finding sufficient money to purchase the business assets. Funds are released so the deceased’s shares can be bought quickly and efficiently.

It’s never easy losing a business partner, but the core business returns to normal with the minimum of fuss. This helps employees, customers and suppliers.

Shareholder protection categories

There are three key types of shareholder protection insurance. The structure depends on the type of business involved, and also the individual preferences of the shareholders associated with the businesses.

It’s always best to get independent advice before setting up an agreement. Here are the three main options:

A ‘Life of another’ shareholder policy

This kind of policy is appropriate for business is controlled by two shareholders. They tend to run the company on a 50:50 basis, so they apply for a policy on the life of their fellow shareholder.

The cover each take should represent the value of their current shares in the business. To minimise costs and to avoid tax and national insurance payments, the shareholders pay the premium from their own monies – not the company’s.

If one of the shareholders die, an insurance payment is made to the surviving policy holder. They can then use the funds to buy shares from the deceased’s family or estate. When this is completed, the surviving partner will become the sole owner of the company.

Company share purchase method

Instead of individuals taking out cover, with this form of shareholder protection insurance the company buys back shares from a deceased shareholder’s estate.

The company controls the policies on each of the shareholders. Crucially, the monetary value of the policies should match the value of each partner’s shares.

Because the company pays the premiums, it receives any funds when a shareholder dies. This can be a complex and lengthy process. The best advice is to engage corporate lawyers to make sure that policies are fully compliant.

‘Own life’ policy via a business trust

With ‘own life’ cover, the individual shareholders take out their own policy which is then held under a business trust. Like other kinds of policy, it should equal the value of their shares. The trust can be established as a fixed term, or to be valid through to retirement.

If a shareholder dies, the other shareholder(s) can then use the subsequent funds to buy their shares.

Impartial insurance advice for business owners

Like longer-term investments, retirement and care fees planning, shareholder protection is something that is too easily put on the back burner. That, however, does not guard against the unexpected.

It’s a tough subject but one that should be approached and tackled.

That’s where Logic Wealth Planning helps. We have years of experience. We take a balanced approach to putting things in place that help investors achieve balance in life and business.

Our aim is to help clients understand what they need and how it can work for them in the long term.

Call us and we’ll help you achieve business peace of mind: 0808 1234 321.