Rigby Financial

What is Shareholder Protection Insurance?

If a director or shareholder of your company were to become critically ill or pass away suddenly, your business could be financially at risk.

The guidelines may not be clear about where that key employee’s stake in the company will go and without the right measures in place, you could see your business lose money, as their share of the business could be left to their spouse or children, who may take over their share without much business knowledge or worse sell them to a competitor

However, shareholder protection or director share purchase cover could prevent this from happening, by protecting each of the shareholders through paying out a lump sum equivalent to the value of their stake in the business and allowing the remaining shareholders to purchase those remaining shares and retain control of the business.

This form of the policy can often be complex so it’s always best to speak to a professional adviser before taking out such cover. Don’t hesitate to get in contact with one of our experienced IFA’s today for more advice and help with finding the perfect solution for your business.

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    Why do I need Shareholder Protection Insurance?

    Shareholder protection and Partnership protection are types of business protection insurance, which allows business owners to buyback shares in the company or a partnership from a shareholder or partner who is diagnosed with a critical illness or dies.

    Shareholder protection can provide your business with a critical safety net in such an event helping you and your remaining shareholders or business partners stay in control of your company or business and minimise disruption at what will already be a devastating time.

    Any business with multiple shareholders could benefit from shareholder protection or partnership protection insurance, regardless of size or industry.

    Without shareholder protection or partnership protection, it would be possible for one shareholder or partner to sell their shares or share of the business to a third party in the event of a critical illness or death, even against the will of the remaining shareholders or partners.

    When do I need to get Shareholder Protection Insurance?

    If you want to protect your business in the case of unforeseen tragedies it is worth looking at shareholder protection or partnership protection as early as possible.

    With shareholder protection insurance or Partnership protection in place, you can have peace of mind within your business that any transition will be smooth with minimal disruption, with the knowledge that the bereaved families are also assured they have protection.

    How do I set up Shareholder Protection?

    The first job is to understand what level of shareholder protection cover your business requires.

    The amount of cover you’ll need will be dependent on the capital it would cost to buy out the covered shareholder or partner in the event of critical illness or death.

    You can get a general idea of how much this would be by discussing it with your company accountant and between yourselves as owners of the business. An independent Financial Adviser can also assist you with this if required.

    An Independent Financial Adviser can then recommend an appropriate protection provider to suit you and your business’s individual needs, then guide you through the process of setting up the plans, and appropriate trusts to ensure that the correct plans are in place for your business.

    Your IFA and solicitor can also ensure that your limited companies memorandum of articles and association and partnership agreement mirror your share option agreement that would be put in place when you arrange your cover.

    Does Shareholder Protection Insurance affect Shareholder rights?

    If correctly structured then Shareholder rights are unaffected, however its vitally important that you engage closely with a qualified Financial Adviser when setting up and reviewing Shareholder or partnership protection.

    Talk to your independent financial adviser for more information.

    How is Shareholder Protection Insurance calculated?

    You will need to have the personal information of the insured person to hand, including their age, lifestyle, and details around any pre-existing health conditions.

    • These will all be used to help calculate the premiums for your insurance.
    • When calculating the cost of protection cover there will be some key considerations:
    • The shareholders or partners influence on business profits

    Who pays for Shareholder Protection Insurance and who owns the policy?

    This would depend on the type of shareholder protection policy you decide to take out:

    Life of another policy

    This involves each business owner proposing Individual life policies on the other partners /shareholders. Premiums are calculated based on individual lifestyle factors and policy proceeds are made to the proposer in the event of a successful claim so they can purchase the shares.

    Business trust

    This involves individual shareholders having their own policy but written as a business trust so that in the case of death or critical illness, shares are split equally among the remaining shareholders.

    How much does Shareholder Protection Insurance cost?

    The cost of your shareholder or partnership protection insurance premiums will depend on a number of key personal indicators such as lifestyle factors and business indicators such as profits and shareholder contributions to the company.

    Get in touch with your Independent Financial Adviser for a clearer indication of how much you’ll pay.

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