What’s the difference between Shareholder Protection, Partnership Protection and Relevant Life Cover?
Shareholder protection insurance is a critical part of protecting your business should you or a fellow shareholder become critically ill - and be unable to remain in the business - or die.
It’s not something you want to think about.
But as a business owner you know you have a responsibility to protect your company, your employees and, ultimately, yours and your fellow shareholders’ families in the event of unforeseen tragedies.
Shareholder protection insurance can give you that by making sure the funds are available to you to buy back shares and retain ownership of your company in a smooth process.
It also provides reassurance to your shareholders’ families that they’ll receive fair market value for their shares and provide them with some financial peace of mind during what will already be a trying time.
But understanding shareholder protection can be a bit tricky.
There’s lots of terms, rules, regulations and descriptions of what kind of insurance you need, what the requirements are to get them and how premiums work.
Here, we’ll help you understand some of the key terminology and concepts behind shareholder protection so you’re better prepared.
What is shareholder protection?
Shareholder protection is an agreement between yourself and your fellow shareholders that outlines what would happen to the remaining shares should you or they become critically ill or die.
Your shareholder protection policy would pay out to the remaining shareholders in the event of such a tragedy, enabling them to buy back the outgoing shares and retain control of your business.
It is important that you have shareholder protection if your business is owned by more than one shareholder, because the future ownership and direction of your business could get complicated if you don’t have it in place.
Without this agreement in place, whoever inherits the shares in the business would be free to do do with them what they wanted.
This could include becoming involved in your business, even without the necessary business skills.
Or, in a worst case scenario, they could decide to sell the shares to a third party, including potentially a competitor of yours.
Having this business protection insurance in place also ensures you have the funds available to buy the outgoing shares quickly, without risking the future equity of your company.
But having shareholder protection insurance doesn’t just protect your business.
It can also provide some peace of mind to yours, and your shareholders’ families.
While they may have the power to sell shares without a shareholder protection agreement in place, there is no guarantee that they’ll get a fair market value for the shares.
With shareholder protection, they know exactly what they’ll receive based on the details in the agreement.
Shareholder protection insurance doesn’t just cover deaths
It is possible to take out a shareholder protection insurance policy which pays out in the event of a serious illness which prevents a shareholder from being active in the business.
It doesn’t just have to cover deaths.
This is known as a cross option agreement.
A cross option agreement allows remaining shareholders the option to buy back shares from the individual shareholder, or their representatives in the event of an illness.
In this case, if either side wants to exercise their option within the agreement, the other party has to comply.
It means that even if the ill shareholder doesn’t want to sell their shares in the company, the remaining shareholders could force them into a sale.
What types of shareholder protection insurance are there?
There’s a few kinds of shareholder protection insurance you could take out.
Each one will alter the way policies are paid for, and amounts are paid out.
The first is for each individual shareholder to take out a policy on themselves, and pay into it.
This would be similar to taking out personal insurance but in this case, the policy would be written in trust to the business.
Any claim would then be split equally - or as determined in the agreement - between the remaining shareholders.
Another option would be for each shareholder to own their own policy, with claims being made to the remaining shareholder - or shareholders - in the event of illness or death.
This kind of policy is known as “life of another” and differs from the above option because the agreement isn’t written in trust to the business.
There is also an option for the business itself to own the shareholder agreement and to pay into it directly from the business.
In this case, the payout would be made to the business (rather than the shareholders) to buy back any shares.
What is Partnership Protection?
A partnership protection agreement is essentially the same as a shareholder protection agreement.
The main difference is who the policies apply to.
Whereas a Shareholder Protection agreement is taken out on the business’ shareholders, a Partnership Protection agreement is taken out on the lives of the business partners.
It is typically used for businesses registered as partnerships or limited liability partnerships - rather than those with registered shareholders.
Apart from this distinction, the principles between the two are largely the same.
With Partnership Protection in place, the surviving partner in the business is able to retain control of their company.
Like Shareholder Insurance, Partnership Protection can be used to cover the events surrounding both the death of one business partner, as well as if one becomes critically ill and no longer able to operate within the company.
What is Relevant Life Cover
Relevant life cover is an insurance policy taken out by employers on behalf of their employees.
It means that businesses are able to offer a “death in service” benefit to employees which pays out a tax efficient lump sum to the deceased family in the event they died.
While payments in to the relevant life cover policy are made by the business, the claim proceeds are paid directly to the deceased family or financial dependant - whichever is stated in the policy.
While they can be used for any employee in the business, they are typically used for those employees with a higher annual income - like directors - who want to top up their benefits or go over their personal pension lifetime allowance.
Similar to shareholder and partnership protection, relevant life cover is taken out as a life of another policy, with the business owning and paying the premiums, with the employee being covered and their family receiving the claim proceeds.
What are the benefits of relevant life cover?
As we’ve mentioned, relevant life cover can be extremely beneficial to higher earning employees.
Relevant life cover is also a tax efficient means of obtaining cover because they act as a tax deductible expense to the business, and also claims are paid as tax free lump sum to your employee’s family.
Typically, cover would be calculated taking into account your employee’s age and lifestyle factors and their annual income.
Ultimately the main benefit is that the policy provides some financial peace of mind for your employees’ families should an unexpected tragedy hit them.
How is shareholder protection, partnership protection and relevant life cover calculated
Each of these forms of business protection share similarities in how they are calculated.
Particularly when it comes to the age, lifestyle factors and existing health conditions of those involved in the policy.
Each of these factors will always be taken into consideration and play a large part in dictating the costs of premiums.
It is vital that the information provided is accurate, as any incorrect details, no matter how small, could have an impact on any claims.
In some circumstances, it is possible that time of service to the business, or contribution to the financial success of the business could be taken into account.
Within shareholder and partnership protection, this could be the case if one shareholder or partner is deemed to be of critical importance to the financial income of the business.
If the policy is taken out on an employee, if they are a particularly important part of the business, like a key skilled worker or director, this could also be taken into account when calculating the premiums of relevant life cover.
Talk to an expert to decide on the best policy
Ultimately, whichever protection insurance plan you opt for will be determined by the individual circumstances of your business.
For a basic understanding of how much a policy could cost, you should talk to your company’s management accountant.
At Rigby Financial we’ve helped businesses of all kinds set up business protection cover.
Get in touch today and we can guide you through the process and help you work out which type of cover would be best for you.Get in touch today.