Shareholder protection guide
Shareholder protection is most commonly used to protect:
- Surviving shareholders from losing control of their business
- The business from potential losses and higher costs
- Families of shareholders from inheriting a business they may know little about
What is shareholder protection insurance?
Shareholder protection cover is an insurance policy, or series of separate policies, that pay out in the event of a death and/or critical illness of a shareholder in a business. It’s a topic many business owners are sensible enough to consider, because the ramifications of something unforeseen happening to a business or business owner can be far reaching, and sadly, the unexpected can and does happen.
Bearing in mind that the death of a shareholder would release those shares held in your company through probate to the deceased’s next of kin, you may need to consider:
- How would you run the business if you were lacking a key contributor to its success?
- What if income decreases and costs increase as a result? Would you be able to pay your staff and / or your debts?
- What if the inherited shareholders are inexperienced and under-qualified but decide to get involved anyway?
- Does any one person own 3/4 of the business or more? By owning over 75% of the company, the sale of the whole business could be forced by the inherited owners.
- If surviving shareholders want to buy the deceased shares but lack the necessary funds, how would you tackle this?
- In the absence of an agreement, the estate holder may not be willing to sell the shareholdings for a reasonable price.
Shareholders Insurance can help overcome these concerns by:
- Providing the money required to cover a loss in profits, to support ongoing cash flow, and potentially cover recruitment and staffing costs.
- Providing funds so the company can purchase the shares at a pre-agreed value, ensuring that the surviving shareholders have the money and the rights to retain control. A well planned agreement can also give the option to survivors of selling to the outgoing shareholder.
- Providing the money needed to pay the shareholder that is diagnosed with an illness an income or lump sum to live off without returning to work
- Providing the money to pay the deceased’s family a lump sum as a death in service benefit, to cover the impact on them.
How much does shareholder protection cost?
The value the shares are set at will generally dictate the amount of cover needed, and therefore the monthly premiums. A business valued at £1 million with 4 equal shareholders, will require £250,000 of cover, per person, which is clearly going to be less costly than if the business was valued at £10million. For help valuing your business click here
The term of cover will also affect the price – Typically cover is taken up until a directors’ planned retirement age, or set around a growth plan to the point of a potential sale. Of course, the longer the term of insurance the more expensive it will be. Other factors such as the smoker status, age and health of the shareholders will impact the cost. Costs of critical illness cover can increase for those who do a certain class of high-pressure / high-risk / high-manual work occupation / work at heights.
Remember that each insurer is different, and each policy will have pros and cons. Premiums between different insurers are likely to vary in relation to things like health, age and agreed share value, and different insurers will be cheaper/more expensive depending on individual circumstances.
Policy terms will differ depending on the individual, for anyone with pre-existing medical conditions or in one of these job roles, for example, because each insurer underwrites things in their own way and has their own specialities. Some are more flexible with certain illnesses, some more flexible with certain job roles, some with smokers, some with older applicants etc etc. This can mean that at the point of full application and underwrite, premiums come out higher than you were first quoted. This is why it’s important to use a specialist who knows the market, because if the wrong insurer is approached it may be costly, and even result in a declined application where another insurer would offer terms.
Life of another
In this arrangement, each individual will take out a policy on another (far simpler when it is a partnership rather than a Ltd company). This has its downsides though as older and more unhealthy individuals, for example, will be seen as a greater risk to the insurer and a healthier, lower risk individual will end up paying more than their fair share.
Is Shareholder Protection tax deductible?
Depending on how it’s arranged there is the potential for your premiums to be treated as tax deductible by HMRC. However, if this is the case it is also likely to be treated as a benefit in kind and may be taxable on the shareholders income. It is always best to speak to your accountant for advice on all things tax, so we recommend you do so to fully understand how the implications outlined above might apply to you.
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