Shareholder Protection Insurance | Everything you need to know

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We offer a fully advised process and we will set the policies up in the correct trusts in the correct format to make the solution as tax efficient as possible.

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Shareholder Protection Insurance

This page will cover an introduction to shareholder protection insurance. In basic form it provided a succession plan for your business should one of the shareholders die or become ill. For example if one of the shareholder were to pass away, then it would give the remaining shareholder the funds to buy the shares that the deceased owned. It can also be set up to buy the shares should the shareholder become ill. 

Benefit of Shareholder Protection Insurance

The benefits of setting up shareholder protection insurance are twofold. They will benefit the deceased family and they will benefit the remaining shareholders. Let us look at these two individuals.

Here’s How We Work

 

  1. You can either request quotes or contact us to discuss the protection you need.
  2. We’ll provide you with competitive and customized solutions that cater to your specific requirements.
  3. Once you give us the green light, we’ll take care of all the paperwork and even put the policies in trust if required.

Family Benefits

If for example one of the shareholders owned 33% of a business and they were to die. To make things simple lets value the business at £3,000,000 and lets say their shares are worth £1,000,000. The spouse would normally be the one who would inherit the shares. But the remaining shareholders usually would not have spare £1 million as a cash lump sum freely available. So the chances are that they might offer the spouse a smaller sum than the shares are worth. Or another option is that the spouse could sell the shares to someone else potentially a competitor. Another option would be that the spouse could potentially keep the shares and get involves in the business. But usually the spouse would have other commitments and would not want to get involved in the business.

So it will be very likely that the spouse could not sell the shares at all or sell them at a massively discounted price. With a shareholder protection policy in place it would provide a lump sum payment to the remaining shareholders. The sum assured would be pre-agreed by the business owners. This would allow the individual shareholders to buy the spouses company shares at fair price.

Shareholder Benefits

Above we looked at how the insured persons spouse or family would benefit but how about the remaining shareholders of the limited company?

If we look at the above we mentioned that the insured person’s spouse now owning 33% of the shares that they cannot sell they might instead want to get involved in the business. For the remaining shareholders this can cause a problem as they might not get along with the spouse, the spouse might not have the experience, knowledge and might not be a good fit for the business. This situation can be a threat to the business success.

Also above we mentioned the spouse desperate to sell the shared might sell these to another competitor. Again the remaining shareholders would not want this to happen as again this is a major threat to their business and could lead to a competitor taking over the business.

Therefore a shareholder protection policy taken out by each of the business partners giving the shareholders the funds required to by the spouses £1,000,000 worth of shares would stop the above and allow the shareholders to retain control of the business. it will also ultimately mean the value of the shares that they each own will now have gone up in both value and percentage.

Tax Implications

This form of succession planning is quite complex and you should seek financial advice, legal advice, tax advice and bespoke advice unique to your own situation so the guidelines below will just give a brief overview of what company owners need to watch out for.

It’s always important to consider the tax implications of any business decision and shareholder protection is no exception. By paying for shareholder protection through the business, corporations can save on their taxes by claiming it as an expense. However, it’s important to ensure that the agreement is correctly arranged in order to avoid any unexpected tax liabilities.

One of the key considerations when arranging a shareholder protection agreement is whether or not the shares will go into the deceased shareholder’s estate before being purchased by surviving shareholders. If the agreement stipulates that the shares must be sold by the estate and purchased by surviving shareholders, then they may not qualify for business property tax exemption and could have significant inheritance implications. However, with careful wording, it is possible to structure the agreement in a way that allows for this exemption while still achieving the desired outcome. Ultimately, seeking advice from a specialist business protection adviser can provide invaluable support in navigating these complexities and ensuring that all parties are adequately protected while minimizing any potential tax liabilities.

How the policies should be set up

There are various ways in which shareholder protection can be taken out and set up. We work closely with your accountant and other professional connections to ensure the cover is setup in the correct way for your business.

In order to protect individual shareholders, it is recommended that each shareholder takes out a separate “own life” policy. This policy will insure them for a sum assured equivalent to the value of their company shares. By taking out this coverage, the shareholder can rest assured knowing that if something were to happen, their investment in the company would be protected. Additionally, if they choose to write this policy into trust, they can benefit their co-shareholders in case of unforeseeable events.

In order to ensure smooth business operations and protect against unexpected events, it may be necessary for shareholders to enter into an explicit agreement. This agreement should state that in the event one of them dies or suffers from a critical illness, the remaining shareholders will have the option to buy their shares. This protects each shareholder’s interests and ensures that there will not be any significant disruption or loss of value within the company. Having clear and concise agreements such as these in place helps guarantee continuity within an organization even during unexpected events.

Valuing the business

One of the key factors a business owner needs to consider when valuing their company for Shareholder Protection is their company’s cashflow. This refers to the money that is coming in and going out of the business on a regular basis, including revenue from sales and payments made for goods and services. A healthy cashflow is a good indicator of a strong business, as it shows that the company has enough money to cover its expenses and reinvest in growth opportunities. When valuing a company for Shareholder Protection, advisers will often use cashflow as one measure of how much the business is worth.

However, it’s important to note that there are several different methods an adviser may use when valuing a business for Shareholder Protection. Cashflow is just one factor that can be taken into account, along with other financial metrics such as net assets, market value, or earnings potential. Ultimately, the valuation will depend on the unique circumstances of your business and what your Shareholder Protection insurance policy requires in terms of coverage. By working closely with an experienced adviser who understands these various methodologies and can help you navigate through them, you can ensure that your shareholders are protected while also maximizing the value of your company.

Premium Equalisation

Shareholder Protection Premium Equalisation is an essential aspect of business trust policies. When a group of shareholders decides to take out an own life policy individually, they may need to equalize the premiums paid. This is done to prevent HMRC from considering unequal premiums as a “gift” or “wealth transfer” from those who are paying more to those who are paying less. If HMRC views this as a gift, there could be inheritance tax implications if there is ever a claim.
One common scenario where this protection becomes important is when one shareholder faces higher premiums due to their age or health condition compared to their younger and healthier counterparts. Equalizing premiums ensures that each shareholder contributes fairly towards the policy without incurring an unexpected tax bill in the future. The importance of Shareholder Protection Premium Equalisation underscores the need for careful financial planning and consideration while executing business trusts, ensuring legal compliance while safeguarding shareholders’ interests against unanticipated costs down the road.

Here’s How We Work

 

  1. You can either request quotes or contact us to discuss the protection you need.
  2. We’ll provide you with competitive and customized solutions that cater to your specific requirements.
  3. Once you give us the green light, we’ll take care of all the paperwork and even put the policies in trust if required.

Life Cover or Life with Critical Illness Element

When considering life insurance, there are primarily two types of policies: a life cover policy, and a life and critical illness cover policy. A life cover policy is straightforward in nature– if the insured shareholder dies or is diagnosed with a terminal illness with 12 months or fewer to live, the policy will pay out. This type of policy offers peace of mind to the insured’s beneficiaries in the event of their passing. However, it does not offer coverage for any other eventualities such as loss of income through serious illness.

On the other hand, a life and critical illness cover policy can provide coverage for several different eventualities that may impact an individual’s health and wealth. This type of policy can provide coverage if an individual is diagnosed with a critical illness like cancer, multiple sclerosis or suffers from a stroke or heart attack after which they may be unable to work. The claim could also be made in case an insured shareholder passed away during the term period of the insurance. With advancements in medical treatments increasing survival rates after illnesses such as cancer and strokes, having both types of coverage may provide further peace of mind by allowing individuals to have financial protection from life’s unpredictable circumstances beyond just death alone.

Shareholder Protection Agreements

A cross-option agreement is a critical component of any shareholder agreement as it addresses the issue of transferring ownership of shares in the event that one of the shareholders dies. The agreement sets out guidelines on how to handle shares and other assets left behind by the deceased shareholder. Ideally, all shareholders involved will enter into the agreement so that there is a clear understanding among everyone about what needs to happen next. Regardless of who owns the policy, setting up a cross-option agreement is vital for any company with multiple shareholders to ensure an orderly transition should anything happen.

It’s worth noting that when each shareholder decides their Relevant Proportion or value of shares, there are typically three valuations options available: open market value, fixed value, or fair market value. Each method has its advantages and disadvantages, and seeking advice from an accountant and financial advisor can help determine which valuation would be best for your specific situation. Ultimately, it’s essential to get an accurate valuation as having a solid foundation upon which to establish values will prevent any disputes between shareholders if something does go wrong down the line. Therefore, every company with multiple shareholders should prioritize drafting a comprehensive cross-option agreement as part of their overall business strategy.

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If you have any questions or would like to learn more about our business protection insurance products and services, we invite you to contact us today. You can reach us via email or by phone.

Don’t wait until it’s too late. Contact us now to learn more about how we can help you protect your business and secure your future. We look forward to hearing from you soon!