Shareholder Protection FAQs
Shareholder Protection is a type of insurance policy designed to help businesses buy back shares from a shareholder’s estate if they pass away or become critically ill. This ensures continuity for the business and provides financial security for the shareholder’s beneficiaries.
Shareholder Protection helps:
Prevent disruption to the business.
Ensure remaining shareholders retain control.
Provide fair compensation to the deceased or critically ill shareholder's beneficiaries.
Avoid external parties becoming involved in the business unexpectedly.
Each shareholder takes out a policy that covers their shareholding value.
If a shareholder passes away or becomes critically ill, the policy pays out a lump sum.
The remaining shareholders use this pay-out to buy back the shares, ensuring business continuity.
Shareholder Protection is essential for businesses with two or more shareholders who want to:
Protect their ownership structure.
Ensure a clear succession plan.
Avoid conflicts with beneficiaries or external parties.
Life Insurance: Provides a lump sum if a shareholder passes away.
Critical Illness Cover: Pays out if a shareholder is diagnosed with a specified critical illness.
Combined Policies: Cover both death and critical illness in one plan.
The value of each shareholder’s shares is usually based on their ownership percentage and the overall value of the business. It’s important to regularly review and update the policy as the business grows or its valuation changes.
The pay-out is usually made to the remaining shareholders through a legal agreement, such as a cross-option agreement or buy-sell agreement, ensuring the funds are used to buy the shares from the deceased shareholder’s estate.
A cross-option agreement is a legal document that allows:
The surviving shareholders the right to buy the shares from the deceased’s estate.
The deceased’s estate the right to sell the shares to the remaining shareholders.
This ensures the process is clear and legally binding.
If a policy includes Critical Illness Cover, a lump sum is paid out, allowing the other shareholders to purchase the critically ill shareholder’s shares if they can no longer participate in the business.
Premiums for Shareholder Protection policies are generally not tax-deductible. However, the payout is usually free of income tax, ensuring the full benefit is available for share purchase. Always consult a tax advisor for specific advice.
Setting up Shareholder Protection involves:
Assessing the value of each shareholder’s shares.
Agreeing on the appropriate type and level of cover.
Drafting a legal agreement to outline how shares will be bought and sold.
Working with a financial advisor or specialist to compare policies and providers.
Yes, it’s important to review and update your Shareholder Protection policy regularly to reflect changes in the business’s value, ownership structure, or the shareholders’ roles.
Policies can be tailored to your needs. They often run until a specified age or for a fixed term that aligns with your business’s objectives.
Contact us today for a free consultation. Our experts will guide you through assessing your needs, setting up the appropriate policies, and ensuring your business is fully protected.