Shareholder Protection Insurance
Shareholder protection insurance is designed to help businesses and shareholders buy a terminally ill or deceased person’s share of the business. If the shareholder was to pass away and you didn’t have shareholder protection in place, then the shares would pass to their estate and the family would decide what to do with them.
Depending on the importance of the shares that are passed onto the family, they may try to change or influence the direction of the business with little experience, or they may sell the shares onto someone equally as inexperienced, or even a competitor. Moreover, current shareholders may also want to purchase the shares, but may not have the funds to purchase them or may have to wait for probate.
Shareholder protection insurance can help to bypass this by providing funds so that the business owners and shareholders can purchase the equity of the deceased shareholder. And a shareholder agreement can help to decide what will happen to a shareholder’s shares if they were to pass away. This provides peace of mind for the business and for the shareholders as there won’t be any confusion about what happens to the shares and the business can continue as usual without a large amount of disruption. Also, it guarantees that the family of the shareholders will get a sum of money at a fair, mutually agreed price once the shares have been bought.
Furthermore, shareholder protection doesn’t just have to pay out once the shareholder has passed away. Some policies will also pay out once a shareholder has been diagnosed with a terminal illness, letting them sell their shares at the agreed price so the business can carry on operating as normal.
How it works
Every shareholder takes out either a life cover or life and critical illness cover policy, they each pay their own premiums, or the premiums can be paid by the business; however, they would be taxable on each individual shareholder). Then each policy would be put into trust, this helps to avoid inheritance tax and speed up the process of the policy paying out. Then, a written agreement or contract will be created, and each shareholder will be in this contract. This is known as a “cross option agreement”, a mutual agreement that guarantees the remaining shareholders can have the option to purchase the shares from the deceased shareholders estate. Or the deceased person’s estate has the option to sell the shares to the remaining shareholders.
Similarly to a personal life insurance product, shareholder protection insurance applications and premiums are based on your health, age and any pre-existing medical conditions that you have. Shareholder protection insurance varies greatly from provider to provider, and it’s important to pick the one that’s right for you, we will always pick the best cover option for you so that you have peace of mind that your business and shares will be protected.
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