A Shareholder Protection policy allows business owners to buy shares back from a deceased co-shareholder, or one who is diagnosed with a critical illness.
What is Shareholder Protection?
Shareholder Protection is a policy designed to support the existing and remaining shareholders in a business.
If a business owner or shareholder dies, or is diagnosed with a critical or terminal illness, their share of the business would usually make up part of the estate. Shareholder protection is designed to put an agreement in place to enable the surviving owners to purchase the deceased owner’s shares from the estate instead of the shares being passed to the beneficiaries.
How does Shareholder Protection benefit the business?
Dealing with the death of a shareholder can be a difficult time therefore making arrangements beforehand is advisable. Shareholder protection benefits the business by giving the shareholders and their families peace of mind in knowing that the finances will be dealt with fairly and correctly in a pre-agreed away in the event of a claim.
Shareholder protection will also protect the remaining shareholders and the business from potential financial difficulty which may arise from having to buy back shares.
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How much Shareholder Protection insurance do you need?
The level of cover required will be determined by the value of the share held by the shareholder.
Shareholders will likely have a clear view of the value of the business, however, this is not always the case. A business value calculation is available to help determine this figure, as it needs to be justified and established in order to complete the financial underwriting when the policy is being set up – we will of course guide shareholders through this process.
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If a business owner dies with no Shareholder Protection in place, their share in the business could become part of their estate and may be passed onto their family. This means that the surviving business owners could lose control of a proportion of the business, or in some circumstances, all of it.
The family may then choose to either become involved in the ongoing running of the business, which can sometimes cause problems if their vision isn’t aligned with the direction the business was heading, or they could choose to sell their share to a competitor.
Having Shareholder Protection looks to protect your business and its interests.
Like all types of insurance, Shareholder Protection premiums are based on risk. The monthly amount will depend on a number of factors relevant to the insured person, including:
- Their age
- Lifestyle and occupation
- Health status (and health history)
- Smoking status
- Alcohol consumption
- Family medical history.
In situations where one of the owners of a company is no longer part of the business, the Shareholder Protection agreement will usually no longer apply to that person.
The policy will automatically revert to the settlor/life assured.
What are the benefits of Shareholder Protection?
Losing a valuable shareholder, whether through illness or death, can have a destabilising effect on a company.
Here are some the ways Shareholder Protection can help you safeguard your business:
- You stay in control of the business by preventing the shareholding from being inherited by an unwanted beneficiary, whose priorities may not align with yours.
- You can reduce disruption at a challenging time for your business by making an eventual transfer of shares as orderly as possible.
- You have the flexibility of coming to different agreements on how to manage the shares; for example, owners could buy shares back from a shareholder who’s diagnosed with a critical or terminal illness.
- You can avoid costly buy-out capital and you won’t have to dip into your savings.
- You can ensure there is greater transparency for the insured person’s beneficiaries as they’ll have a clearer picture of what they will receive for selling the shares to other shareholders.
What would be your commitment as a business?
- To provide a fair presentation of the risks, e.g. accurate accounting data.
- To provide complete and accurate information on all members within the policy within the given time period
- To notify Personal Healthcare Management or the provider about any claims as soon as possible
- Letting us or the provider know of any changes to your business, i.e. primary business activities and location
- To let us or the provider know if a member’s benefit should end
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