Shareholder Protection Insurance

Shareholder Protection in detail

Most wills are structured with family in mind and so it is no surprise that a person’s shares would usually form part of that estate. But what does that mean for the business?

Without good planning this could result in a company’s shares passing to a family member who has little or no interest in the business. This can have a devastating impact on the business. If your business has a few key shareholders it is vitally important that this has been considered and planned for.

Shareholder Protection insurance will pay out a lump sum equitable to the value of the shares held by a shareholder to the business, providing them with the funds to purchase the deceased shares.

How does shareholder protection insurance work?

A shareholder protection policy will pay out a lump sum to a named individual or a group of beneficiaries in the event of a shareholder’s death to ensure they have the funds to purchase the equity of the person who passes away. It can also include a critical illness element in the event a shareholder can no longer work due to a critical illness or injury.

Usually a ‘cross-option agreement’ will need to be put in place to ensure the sale of the shares runs smoothly. It guarantees that if one of the shareholders covered by the policy dies or is critically ill, there would be one or more shareholders that are willing to buy the shares. Often this is completed through a trust.

It is also important that a fair distribution of costs and benefits can be demonstrated and a specific methodology is used to achieve this.