Shareholder protection insurance

Many SMEs are formed by more than one person; they’re either a partnership, a limited liability partnership (LLP) or a company with shareholders. That means other people have a stake inthe business andwith themcomes a risk – what would happen if one of them died or suffered a terminal or critical illness and couldn’t work? Ideally, you would want the business to continue – but would that be possible?

Without some form of legally binding succession planning, it’s possible that any shares held by your co-owner would be inherited by their family or other beneficiary – and they may not have the interest, the time or the skills to make the business a success. In fact, given theirsudden loss and change in circumstance, they may choose to sell the shares they inherit. Would you be able to buy them? If you couldn’t,where would that leave you?

It’s important to have a legal agreement setting out what would happen if one of your co-owners died or suffered a critical illness andthis could be set out in the partnership agreement, company’s articles of association or as a separate agreement. Doing so means that, if a shareholder died or became critically ill, a legal agreement would give the remaining shareholders the right to buy any shareholding either direct from the shareholder or from their beneficiaries.

Although the agreement would ‘set the scene’ and allow you to buy the shares, it doesn’t provide the means of being able to do so– which is why ‘shareholder protection insurance’ is a good idea.

Shareholder protection insurance combines a life and, if required, critical illness insurance policy on the lives of each individual shareholder with a suitable legal agreement. In the event of the death of a shareholder or their becoming critically ill, the remaining owner, or owners, would receive a lump-sum payout allowing them to buy the shares and retain control of the business, along with a legal instrument setting out how this should be achieved.

To cover most situations, shareholder protection insurance can be written in three forms:

1. ‘Life of another’ policy

   This is used when a business has just two shareholders. Both apply for a policy on the life of their business partner, the policy representing the value of the shares each partner holds (which may not be equal). Should one of the shareholders die or become critically ill, the surviving shareholder becomes sole owner of the business.

2. ‘Own life’ policy
   Individual shareholders take out their own policy, equal to the value of the shareholding they hold, and this is held under trust. If a shareholder dies or becomes critically ill, the remaining shareholders use the policy payout to purchase the shares which are then equally distributed amongst them.
3. Company share purchase
   The company takes out policies against all the shareholders, the individual policies covering the value of each shareholder’s stake. If one of the shareholders dies or becomes critically ill, the company receives a payout which allows it to buy the shares from either the shareholder or their beneficiaries. Setting up a company share purchase scheme can be a complex process.

It’s important to note that your co-owner’s dependants and beneficiaries also benefit from your business having shareholder protection insurance as, in the event of the death or critical illness of your co-owner, a robust mechanism is in place that safeguards their financial interest.

Although shareholder protection insurance won’t compensate for the loss of a friend and valued member of the business, it may help you keep your business and secure its future.
 
 
How can One Financial Solutions help you?

Life is full of risks. As a firm of independent financial advisers we can provide you with impartial advice to help you identify the potential risks that you and your business may face.

We’ll work with you to plan an appropriate protection strategy, recommend the best products from across the whole of the financial services’ market, help implement the protective safeguards you need and provide a periodic review. It’s all about ‘risk management’; knowing the risks you face means you can protect your interest in your business.

So, if you’re looking for help with any aspect of protecting your business, please call us on 020 3714 9565 or ask us to call you by sending an email to admin@onefinancialsolutions.co.uk.