What is shareholder protection insurance and how does it work?

Shareholder protection insurance can allow shareholders to develop a succession plan should the unthinkable happen. It’s a way for companies to maintain control after the untimely death of a shareholder and to protect the company from competitors and unwanted third parties.

This article guides you about shareholder protection insurance, including the following topics:

What is shareholder protection insurance?

What does shareholder protection insurance include?
Do I need shareholder protection insurance?
How much insurance do I need?
How much does shareholder protection insurance cost?
How to find an insurance provider to protect shareholders.
Final thoughts and frequently asked questions.
What is shareholder protection insurance?
business shareholders all own shares in a company, which means they have control over how the company is run.In the event of the majority shareholder’s death, their shares will automatically be transferred to their estate. Ownership and control are then passed to family members who may have no interest in the business or have a completely different vision of the business’s future, based on little or no prior experience. experience. Alternatively, they can sell their shares to outsiders, who may be even less interested in maintaining the spirit of the company. Shareholder protection insurance aims to establish a clear succession plan and provide adequate financial support to complete the transfer of ownership to surviving shareholders.

Often, the surviving owners want to buy the remaining shares to retain control of the company and follow the same path.There can be two obstacles to this: the first is waiting for probate and the second is not being able to raise enough capital to buy the shares. Shareholder protection insurance solves this problem by establishing an agreement signed by the major shareholders, usually stipulating that in the event of the death of one of them, their shares will be transferred to
surviving shareholders at a reasonable price agreed with the police. The insurance company then typically provides this amount as a payout to the survivors so they can buy back their equity.

This type of insurance is not only important to maintain the nature of the business but is also designed to minimize business disruption and uncertainty. Losing an employee is a challenge for a business, but losing a shareholder can hinder all of the company’s decisions.Waiting for probate or transfer of ownership to new shareholders can cause serious disruptions in productivity and prevent surviving shareholders from making important decisions. This type of policy is designed to facilitate business continuity and ensure that the business can trade normally.
A shareholders’ agreement can also ensure protection for the family. Typically, all shareholders agree on a fair amount for their shares in the company before signing the agreement. This often ensures that beneficiaries receive a fair price for the shares and can also reduce stress on the remaining family by providing a predetermined estate plan.

What does shareholder protection insurance include? In the event of the death of a major shareholder, shareholder protection insurance usually pays a sufficient cash sum to the surviving shareholders to enable them to purchase shares of the deceased company.The exact terms of the legal agreement depend on the type of insurance policy purchased. In the UK, there are three main types of shareholder protection insurance.

Life of another

If in a company there are only two shareholders, they can apply for the life of another scheme. Each shareholder takes out a life insurance policy on the other’s life with the insurance amount representing the amount he needs to purchase the partner’s equity. Each shareholder pays his own insurance premium.This option often saves taxes because the payments are often tax-free.

Company stock repurchase insurance

Under this form of arrangement, the company issues a policy to each individual shareholder. The amount of insurance under each contract corresponds to the value of the individual’s shares in the company, calculated and agreed upon when signing the contract. In the event of the death of one of the insured shareholders, the company becomes the beneficiary of the payout, which can then be used to repurchase shares.

Individual life insurance policies held as part of a corporate trust

The final form of shareholder protection insurance involves each shareholder purchasing an individual life insurance policy individuals, held as part of a corporate trust.If one of the shareholders dies, the survivors can use the principal amount paid under the contract to buy the deceased’s shares and the shares are divided equally among the surviving shareholders.
Life or Life and Critical Illness
Within these three types of insurance policies, you can arrange coverage in two ways, to determine the type of claims the policy can cover. That is:

Life Cover. This policy usually only pays out if the insured shareholder dies or is diagnosed with a terminal illness, with less than 12 months to live.
Life insurance and critical illness. This policy can intervene in the event of the death of the insured shareholder, if he suffers from a serious illness or if he is the victim of an accident that renders him incapacitated.Critical illness cover
tends to be an optional add-on that expands the policy’s coverage to cover more claims. However, the consequences of a shareholder’s death or serious illness tend to have a similar impact on the company. A serious health problem that prevents them from returning to work can result in a loss of experience, skills and contacts as if they were no longer there. It could also lead to barriers in making decisions to move the company forward if
shareholders are too ill to approve the plan.

Policies differ in what diseases they can cover.Typically, a critical illness insurance policy can provide cover for the following types of health problems, either as standard or as an option:

cancer (policy can specify specific types)
heart attacks
major organ transplants
kidney failure
multiple sclerosis
respiratory failure
liver failure
bacterial meningitis
paralysis or permanent total disability
Parkinson’s disease.
In addition to the main losses typically covered by shareholder protection insurance, insurance policies often come with additional benefits.


These services may include:

virtual GP services, usually available 24/7
medical second opinion services, which provide staff with a second opinion on diagnoses their predictions from leading medical specialists
counseling and stress helpline
health programs, such as nutrition or fitness programs that encourage healthier lifestyles.
discount, e.g. for gym membership.

Do I need shareholder protection insurance?

Every company, regardless of size, must consider the potential impact of the death or incapacity of a shareholder. There are two things to consider: first, whether the surviving shareholders can afford to buy back the deceased’s shares and, if not, whether this could affect the future of the company. If the remaining owners cannot afford to buy back shares, the company must prepare for a new direction from a new shareholder whose interests and values ​​may not be consistent with those of the company. treatment of survivors.

Not only could the business lose its essence under new ownership, but if the deceased’s family needs to free up cash quickly, they may have no choice but to sell to an interested buyer. fairy. There is no way to know whether this buyer has conflicting goals with the business. Worse yet, they could be competitors. Additionally, even if the remaining shareholders have enough money to purchase the shares themselves, probate can be a lengthy process. While the stock is stuck in
probate, the company can lose money, hinder productivity, or even go out of business altogether.

Another consideration is what would happen to the shareholders’ families in the event of their early death. A shareholders’ agreement can give business owners peace of mind because it can ensure that the family receives a predetermined amount of shares without having to find a buyer or negotiate a possible price. causing them to lack. If your family is struggling financially without you, shareholder protection insurance may be worth considering to ensure they receive the right amount of .

Finally, small businesses , in particular, should seriously consider shareholder protection insurance. It may be more difficult for shareholders of smaller companies to raise enough capital to purchase the remaining shares, putting them at greater risk of losing control.

How much insurance do I need?

The insurance policy must include an amount sufficient to enable the surviving shareholders to purchase the deceased shareholder’s shares in the business. Therefore, the insurance amount must be equal to the value of the capital contribution of the relevant owner. It is important to check this when signing the contract to ensure that the family receives a fair price for their shares. Determining the value of each shareholder’s shares is a complex process, and the vast majority of companies work with accountants to get an accurate estimate.

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