The importance of shareholder protection insurance

Have you considered what would happen if a shareholder in your private limited company, member of your Limited Liability Partnership (LLP) or partner in your partnership were to fall seriously ill, or even die – could you afford to purchase their share of the business?

Without a plan in place, there could be serious implications for the future of your business – shareholder protection insurance can help you guarantee your business is safeguarded should the worst happen.

What is shareholder protection?

Shareholder protection enables surviving business owners to have the option to purchase shares from the deceased owner’s estate.  This not only means the dependants of the shareholder have a willing buyer, and cash for the shares, but also protects the long-term future of the business.

If there is no protection in place in the event of a shareholder’s death, and their share is passed on to the family, the surviving owners risk losing control of that proportion of the business, or in extreme cases, all of it. Potentially, the family could choose to involve themselves in the business or in a worst-case scenario, they could even choose to sell to a competitor.

How does shareholder protection work?

Shareholder protection can provide a lump sum payment in the event of a business owner dying, or being diagnosed with a terminal illness. Some policies also cover specified critical illness at an extra cost.

Should the worst happen, and a business owner does fall terminally ill, or pass away, and a valid claim is made, the lump sum can be used to help purchase the deceased partner, shareholding director or member’s interest in the business.

Cross option agreements

The cross option agreement is a formal agreement between business owners which deals with what may happen to their share of the firm on their death or on them becoming terminally or critically ill. The agreement may include a double or a single option, or sometimes both.

Under a single option agreement only one of the parties to the agreement has the right to exercise an option whilst under a double option agreement either party has the right to exercise an option. In either scenario, once an option has been exercised, the agreement becomes binding.

The benefits of shareholder protection insurance

Dealing with ownership in a company can be difficult in the event of serious illness, or death. Shareholder protection insurance provides a form of succession planning, and can help you safeguard your business in the event of a shareholder’s death.

Some of the benefits include:

  • You can reduce uncertainty by preventing the shareholding from being allocated to an unwanted beneficiary whose priorities may not align with yours
  • You can provide the deceased’s family with an agreed sum for the shares, offering them greater transparency on what they should expect to receive
  • You can ensure a smooth eventual transfer of shares, as orderly as possible, at a time that will otherwise be challenging for your business
  • You can avoid expensive buy-out capital – meaning you won’t need to touch  your savings
  • The business may have a better chance of returning to normalcy which will be beneficial for owners, employees, and clients

Shareholder protection and tax treatment

Although the benefits of shareholder protection insurance are clear, it is important to consider the tax implications:

  • If a policy is correctly set up, there wouldn’t normally be any income tax liability on the proceeds
  • The proceeds from a shareholder protection plan are typically free from any capital gains tax (CGT) liability.

It is usual for the policy to be set up under a trust. A trust can be especially designed for use in conjunction with shareholder protection arrangements and can incorporate some important areas of flexibility.

The beneficiaries will include anyone who is a shareholder in the company in the proportions in which they own shares. A trust can allow for departing shareholders to be removed from the trust automatically and new shareholders to be added and can also provide for changes in shareholding proportions.

Get in Touch

If you would like to discuss your shareholder protection options in more detail or need some tailored advice specific to your situation, get in touch by emailing, or by calling 01254 679131.

The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction.

Is your business protected if the unforeseen occurs?

Many businesses across the UK take time to consider employee benefits or pension schemes. However, what about protecting the business itself? Underestimating the loss of shareholders or key personnel can have a catastrophic impact.

In our latest blog, we look at the key areas to consider when it comes to protecting your business.

Key Person Protection

Key person protection allows you to protect your business from the financial impact of losing a key employee (including owners/managers), whose death or illness would have a significant impact on the financial position of the business.

Key person protection is designed to pay out a lump sum to help the company survive the detriment of losing the key individual who is instrumental to the business. The money can then be used to help replace lost profit or find a replacement.

According to Legal and General, 52% of businesses believe they would have to stop trading in less than a year after the death or critical illness of a key individual – therefore, businessowners should seriously consider whether this type of cover is required to protect the future of their business.

Shareholder Protection Cover

If a shareholder in your private limited company, member of your Limited Liability Partnership (LLP) or partner in your partnership were to die, could you afford to purchase their share of the business? If the answer is no, shareholder protection cover is designed to help avoid the uncertainty of what will happen to a shareholder’s holdings.

Likewise, if a shareholder or owner was seriously ill, shareholder protection can allow the individual to sell their stake to other shareholders to ensure the continuation of the business.

Without protection, and a policy in place, the deceased’s shares could pass to their estate, leaving it to the beneficiaries to decide what to do with their holdings.

By ensuring a shareholder agreement is in place to determine what occurs if/when a shareholder dies, or is critically ill, alongside a shareholder protection policy to provide funds to the remaining company shareholders (if required), unnecessary stress can be alleviated should the unforeseen occur, for both the remaining shareholders, and the family of the deceased.

Lasting Power of Attorney (LPA)

An LPA allows you to appoint an individual who will be your legal representative if declining mental health, brain injuries or physical injury leaves you unable to manage your own affairs and financial wellbeing. The attorney you choose to appoint will represent you if you are no longer capable of dealing with your own finance, health, and welfare matters – so it is paramount to ensure it is someone you trust.

According to the Office of the Public Guardian, 2020/21 saw an 18% decrease in LPA/EPA applications – now is the time to ensure you have plans in place to protect your interests, should you be unable to. Speak to a specialist who can help and support you in planning now for tomorrow.

A business LPA is just as important – especially for business owners. If you became incapable of managing your business interests for any reason, such as deterioration of your mental capacity or serious illness, could the day-to-day actions of the business go ahead? For example:

  • Who would have access to the company business account?
  • Who would pay suppliers or make day to day decisions about the running of the business?
  • Who would sign deeds and authorise share sales?
  • Who would pay your employees?

In the absence of a business LPA, your business could be at risk. By putting in place a specific power of attorney limited to business purposes allows you to authorise individuals to manage your business interests on your behalf.

Get in touch 

Whilst no one wants to think about the death of themselves or of key personnel, or the loss of their own mental capacity, it is essential to ensure your business is protected should the unforeseen occur. If you would like to discuss ensuring the financial stability of your business is protected from unforeseen events in more detail, get in touch by emailing