standard Shareholder Protection Insurance Guide

My Complete Guide to Shareholder Protection Insurance

damianyouellShareholder protection insurance is designed to make sure that in the event of a shareholder dying, there will be adequate funds available to allow the remaining individual’s stake in the company, thus ensuring that they retain control of the business. In this blog post I will look a little closer at Shareholder protection. You can read the whole page or jump top specific areas using the menu to the right.

Introduction to Shareholder Protection

In this article we will be explaining the details and benefits of shareholder protection, including such items as why you need it, how it works and how much it costs. Shareholder protection is a scheme that protects the business against the death of a business partner or a director who holds shares in a company.


Reasons Why You Need It

When a director who holds shares in a company, or a partner in a business dies, all of their business interests are included in their estate. The role of shareholder protection is to make available the necessary funds that can be used to buy back these shares from the deceased’s estate. This has the advantage of allowing the business to operate normally after the death of a partner or director, without the need to try and gather together the necessary funds to complete the purchase. Shareholder protection also benefits the deceased’s relatives who do not have to concern themselves with shares in a business that they have no interest in.

Calculating The Amount of

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Cover

In order to have a clearer understanding of how much cover you need and how much it is going to cost, you will need to know the value of the shares that the director or partner owns in the business. This is something that will need to be reassessed at regular intervals in order to take into account the ever changing value of the shares.


Types of Shareholder Protection Agreements

Due to the sheer numbers of businesses that exist, there is going to be a large number of policies with which you can protect your business with shareholder protection. However, there are typically, only three main shareholder protection agreements from which to choose from. These are known as, Buy and Sell, Double Option (also known as Cross Option) and Automatic Accrual.
Under a Buy and Sell agreement, there are two sections, one is the plan and the other concerns the legal agreement. Each partner or shareholding director is committed to a Buy and Sell agreement and each one has to agree to two items. The first is to ensure that on his or her death, the executor of the deceased’s estate will sell the shares to the remaining business partners or directors. The second item is that they promise to purchase the deceased’s shares in the company.

With a double option (or cross option) agreement, this shareholder protection agreement is included into the partnership, and all parties have to agree to the following things. The deceased’s remaining business partners have the chance to purchase the shares during a specific time period, and that during this period the executor of the deceased’s estate cannot sell the shares to a third party, although they do have the ability to insist that the remaining partners complete the purchase of the outstanding shares in the company.

Next, if one of the partners decides that they want to purchase the shares, all remaining partners have to comply also. This means that the only way in which the shares can remain with the family of the deceased is if none of the remaining partners decides to purchase the shares.

This Double Option is flexible enough to allow the addition of new partners, and the newest partner would have to complete an agreement known as a Supplemental Double Option Agreement.

Tax Implication of Shareholder Protection

Tax Areas to Consider
There are no tax breaks with shareholder protection agreements, and this is because they are classed as drawings by the directors even if the costs of the premiums are taken out of the company accounts. So long as the plans are written in a trust that the other partners or shareholders find suitable, and that there is an arrangement in place to share the expense, then there will not be a requirement to pay inheritance tax before a claim.


Company Share Buyback

When the company buys back the shares of the deceased shareholder or director, they are making sure that the best interests of the company are being looked after without any outside interference. If they did not buy the shares back, then there is a real possibility that the shares could be sold on by the deceased’s relatives to someone who could upset the harmony of the boardroom. As you can see, having the necessary protection in place for buying back shares of a deceased shareholder or director, has a number of bonuses.

About the Author

Business protection expert helping business owners of all sizes protect their families and businesses from the effects of death and illness. Advising clients on shareholder protection, key person cover and relevant life policies. Also offering personal clients excellent advice on Mortgages and Protection solutions. From first time buyers to remortgages. All types of clients considered.

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