Shareholder protection insurance

Read our comprehensive guide on shareholder protection cover, including how it works, pros and cons for taking out a policy and how to set cover up correctly.

Updated

Dec 24, 2020

Fact checked

The death of a shareholder can trigger problems for your company if the shareholder owns a large percentage of your business (enough to influence the direction it goes in), as the shares can be inherited by people you know little about. We look at how shareholder protection insurance can protect your interest, what it includes and how to set it up correctly.

What is shareholder protection insurance?

If your business has shareholders, you’d want to protect yourself in case one of them dies. As the deceased person’s assets would go to their dependents, and their interests may not align with yours, this can have a negative effect on you and your business.

Shareholder protection means that, if a shareholder dies, the remaining shareholders have the opportunity to buy up their portion of the company.

How does it work?

When a shareholder dies, shareholder protection pays out a lump sum to either one or several named beneficiaries. This money can then be used to buy the equity released by the deceased shareholder.

Some shareholder protection policies also include terminal or critical illness cover, where a payout is made if a shareholder develops an eligible condition that means they cannot continue their work. This is only really relevant for founder shareholders, or those actively engaged in the running of the business.

When shareholder protection insurance is used to buy shares, it’s important to be able to demonstrate that there is a fair distribution of costs and benefits across all relevant parties. This ensures that the policy’s premiums and benefits are not subject to inheritance tax and can be done via premium equalisation. There is a specific way to calculate how premiums are equalised – talk to a shareholder protection insurance specialist and your accountant when setting up the policy, to make sure it’s done correctly.

Who is shareholder protection insurance for?

Shareholder protection is taken out for individual shareholders by the business they are founders or investors in. The premiums can be paid for either by the business or the shareholder insured. One or more of the other shareholders are usually named as beneficiaries for the payout, although some policies name the business as the beneficiary.

Of course, this kind of cover may not be needed for people who own a small percentage of shares. Depending on the size of your business, how many shareholders it has and the size of your own portion of shares, anything up to around 10 percent may not be a cause for concern.

The role the shareholder plays in the business should also be taken into account – are they a founder and an active contributor, or more of a silent investor? Do bear in mind that, even if the shareholder didn’t take an active interest in the running of the business, whoever inherits their shares might. Legally, you will have little ground to stop them.

A shareholder protection policy is designed to protect the interests of the business and its remaining shareholders.

What are the main types of shareholder protection insurance?

There are three main types of shareholder protection insurance:

Life of another policy. This type of cover means every shareholder in the company has their own policy. The premiums are calculated the same way as regular life insurance – based on age, health and lifestyle. If one of the shareholders dies, their policy pays out a lump sum to the remaining shareholder so that they can buy the shares. This form of cover is best for when there are only two shareholders to the business.
Own life policy. With this type of cover, each shareholder still has their own policy, but all policies are written in the form of a business trust. This means that, if one of the shareholders dies, the payout is shared equally among all the remaining interested parties.
Business-centric cover. Another option is for the company to buy and pay for the policy premiums. If a shareholder dies, the business then receives the payout.

What is covered?

Shareholder protection covers the shareholders of the business in case one dies. A lump sum payout is given to the surviving shareholders to allow them to buy the shares of the deceased.

Some policies also include cover in case a shareholder becomes terminally or critically ill and unable to work.

The exact terms of the policy will depend on the needs of the business, the personal circumstances of the shareholders and the type of cover that is taken out (see above for the different options).

What isn’t?

Some policies only include cover for death, not terminal or critical illness. Make sure you check the policy terms carefully so that you know exactly what is and isn’t covered.

How much does it cost?

Much like life insurance, shareholder protection is a very individual thing and depends on the personal details of the people being insured, such as age, health and lifestyle. With this type of insurance, the amount of shares a person has in the company is also likely to make a difference.

When looking for shareholder protection, it’s important to shop around and compare policies, as different insurers will have differing prices.

If you’re unsure how to go about this, you can contact a specialist life insurance broker for help.

What are the rules of shareholder protection insurance?

If you want to take out shareholder protection insurance for your business, you will usually have to agree to the following rules and regulations:

Provide accurate information about the insured shareholder, including full lifestyle and health details.
Inform the policy provider if any of these details change.
If the premium is paid by an individual, it must come from taxed income.
If the premium is paid by the company, it can be declared as a business expense, but the insured individual will need to pay income tax as the recipient of a benefit in kind.
Some policies must be set up with a cross option (or double option) agreement. This enables the remaining shareholders to buy the deceased person’s shares, and also sets out what his or her beneficiaries will receive.
If the company has multiple shareholders, all benefits and costs must be shared equally across all parties. This can be done via premium equalisation.

These are general guidelines, but some insurers might have additional terms and conditions that you will need to agree to. Make sure to check the small print of the policy and raise any questions you have with the insurer.

How should shareholder protection be set up?

Shareholder protection insurance can be tricky to set up, but here are the main steps you should take to make the process easier:

Decide what type of cover you need. Depending on how many shareholders the company has, you have a few options for cover. Scroll up to see these explained above. You also have the choice of who gets the payout from the policy – the remaining shareholders or the business itself.
Decide how much cover you need. The level of cover you should take out for each shareholder relates to their share of the company. Some providers have calculators to help you figure this out, and you can also consult a specialist provider or the company’s accountant if you’re unsure.
Collect the shareholder’s personal details. Shareholder protection insurance is a type of life insurance cover, so you will need full details about the shareholder’s age, health and lifestyle in order to take out a policy. Things like whether they smoke, how much they drink and their family medical history will all affect the cost of cover.
Compare policies. Shop around and compare shareholder protection insurance policies from different providers. Rates and benefits vary by insurer, as well as by the type of policy you choose. Remember that not all insurance companies are on comparison sites, so use a combination of sources for your search.
Get advice if you need it. Shareholder protection insurance isn’t the most straightforward type of cover, and setting it up incorrectly can result in the payout being subject to inheritance tax. If you aren’t sure what you’re doing, you can get advice – most policies can be bought from specialist brokers who can help, although you may pay more for this service. Before you buy always make sure you know all the costs involved.

Pros and cons

Pros

Protects the interest of your business if a shareholder dies
Can have either one or more beneficiaries named on the policy
If set up correctly, inheritance tax doesn’t apply to the premiums and payout

Cons

Can be complicated to set up correctly
Counts as a benefit in kind if paid for by the insured shareholder

Bottom line

Shareholder protection insurance can be vital if your business has more than one shareholder. If the other shareholder dies, their shares will likely go to their dependants, which can have a negative impact on your business.

It does make for an extra monthly expense and is not as tax efficient as some other business life insurance policies, so you will have to weight up the pros and cons in relation to your business’s needs.

This type of cover has to be set up in a specific way in order to avoid being subject to inheritance tax, so get advice from a specialist broker if you’re unsure.

Frequently asked questions

No. You will need to provide certain details about the shareholder’s health, lifestyle and family medical history that you are unlikely to know without them providing the information. Even if you do have access to this information, the shareholder will have to be involved in taking out the policy and give their consent.
Some policies require the setting up of a cross option (or double option) agreement, which sets out what the shareholder’s beneficiaries will receive if a claim is made.
That’s up to you. Not all shareholder protection policies will include critical illness cover, and those that do may be more expensive.
Consider what you would like to happen if a shareholder becomes critically ill. Would you be happy for them to keep their shares even if they’re unable to work? There is less risk of their dependants becoming involved in this case, but there can still be implications for the day-to-day running of the business.
A cross option agreement, also known as a double option agreement, is an arrangement between the other shareholders in the business and the insured person’s estate. It sets out who will buy the shares and at what price if the insured party was to pass away or leave the company due to serious illness.
This gives all parties the peace of mind of knowing what the outcome will be and the costs involved.
If there is more than one shareholder to the business, this can be a good idea. For businesses with just two shareholders, a “life of another” policy may be the best option. Each shareholder has their own policy in this case, based on their personal details. If one of the shareholders dies, their policy pays out a lump sum to the remaining shareholder so that they can buy the shares.
It can be even more important for a small business to take out this type of cover, as it’s less likely to have the funds available to buy out an outgoing shareholder at short notice.
There are two options here – the premiums can be paid for by the business, in which case the premiums are tax deductible and can be declared as an expense. However, the cover will then be considered a benefit in kind for the shareholder and so income tax will apply to it.
The premiums can also be paid for by the shareholder insured, but this must be done through taxed income. The premiums can’t usually be declared as an expense in this case, but the cover won’t count as a benefit in kind.

Thank you for your feedback!

Ronny Lavie

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Ronny Lavie was a deputy editor at Finder, specialising in insurance content. She has almost a decade of experience writing about financial topics, including five months spent as the interim managing editor for the Fintech Times newspaper. Ronny has a Master of Arts in Creative Writing from London Middlesex University.

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Shareholder protection insurance

Read our comprehensive guide on shareholder protection cover, including how it works, pros and cons for taking out a policy and how to set cover up correctly.

Get shareholder protection insurance quotes

Get shareholder protection insurance quotes