Which type of shareholder protection insurance is best for your business?


Almost half of businesses are unprepared for the critical illness or death of a shareholder, according to a study by Legal & General. The research also revealed that in 37% of businesses, shareholders would want to purchase the absent person’s shares, but don’t have a plan to fund it.

Shareholder protection insurance can be a complicated subject if you don’t know where to start. But it can help provide funds to quickly purchase shares back into the business in the tragic circumstances that a shareholder is too ill to continue in the business or passes away suddenly.

Here we look at the different types of shareholder protection insurance and how each can be funded.


‘Life of another’ shareholder protection insurance

‘Life of another’ policies are the most straightforward choice, normally used when a business only has two or three major shareholders. Essentially, one shareholder will own the policy of another shareholder and vice versa.

If one shareholder becomes ill or dies, the payout is made to the other shareholder so they can fund the purchase of the remaining shares in the business. Both shareholders pay for the insurance premiums themselves out of post-tax income, so there are no additional tax liabilities. This type of shareholder protection usually only works to a maximum of three shareholders (when each shareholder can own a single policy). Beyond three it can start to get complicated, especially if one shareholder is required to own more than one policy.


‘Own life’ under business trust shareholder protection insurance

An alternative is for each shareholder to take out an ‘own life’ policy for themselves which is held under a trust.The value of the individual’s shares is written into a business trust that pays the remaining shareholders if the individual passes away.The surviving shareholders can then use this pay-out to purchase the deceased’s shares.

Sometimes the company pays for the premiums by deducting them as a business expense, but the shareholders would have to pay tax on them.Shareholders can choose to pay the premiums themselves out of their post-tax income to avoid further tax liabilities.


Company share purchase shareholder protection insurance

The most complicated arrangement is a company share purchase policy, where the business takes out a life policy on each shareholder. The business owns the policy, pays the premiums and receives the pay-out in the event of illness or death.

If a shareholder becomes critically ill or passes away, the business can use the policy pay-out to buy back the shares from the deceased’s estate and cancel them, so the share values increase for the remaining shareholders.

Premiums aren’t considered a business expense in this case, and the shareholders don’t need to deal with any tax implications because the company is responsible. It’s recommended to seek professional advice when setting up this policy, because tax compliance is a bit more complex.


How much shareholder protection cover do you need?

The type of policy and any extras you’ll need depend on the number of shareholders and the value of individual shares. You may want to make sure your policies include critical illness cover, so you can claim if a shareholder develops a specified severe illness and can’t continue in the company.

Most shareholder protection policies also have a type of ‘cross option agreement’ alongside them to set out who will buy which shares and at which prices in the event of the shareholder’s death or critical illness.

A ‘single option agreement’ allows the remaining shareholders to sell their shares if they become critically ill, protecting them from being forced out of the business.

A ‘double option agreement’ allows the shareholder’s family or estate to sell their shares if they pass away, and lets the remaining shareholders decide who buys what percentage of the shares.

You’ll need to discuss these options when setting up your shareholder protection insurance policy.


How to set up shareholder protection insurance

To get shareholder protection, you’ll need to speak with your fellow shareholders and the company’s accountant to determine the best policy based on the capital needed to buy out individual shares. Once you know the level of cover you’ll need, you can speak to a shareholder protection insurance provider to set up your plan.

Whichever policy type you choose, you’ll need to adhere to UK legal regulations.This means total honesty about each shareholder’s life and health, equalising premium costs for all shareholders, and paying premiums appropriately.For example, if an individual pays then it must be with taxed income, and if the company pays and declares it as a business expense then the individual must pay tax on it as a benefit in kind. 

Always inform the insurance provider if individual circumstances change so the policy can be updated accordingly. Having shareholder protection is a vital safety net to keep control of the company and its business partners while supporting the families of deceased shareholders. Don’t risk damaging your business by not having a plan in place for any shareholder’s death or illness; protection insurance will ease the burden for everyone during such a difficult event.