From life of another to a business owned trust, there’s a few options for shareholder protection policies. Here’s the option you have.

Disruption comes in many forms for a business but perhaps no more devastating than the loss of a shareholder.

Besides the massive personal loss, there’s the extreme uncertainty that can come with losing such a key part of a business.

One way to make the process easier from a business point, is to take out shareholder protection insurance.

Shareholder protection guarantees that funds will be available for the remaining shareholders to buy back any outgoing shares, ensuring they remain in the business.

Without shareholder protection, the shares would go to the deceased shareholder’s family and, at that point, they’d be free to do what they wanted with the shares.

But there are a few options when it comes to buying a shareholder protection insurance policy, and depending which one you choose you could get some tax benefits as well.

Types of shareholder protection

Life of another

If you take out a life of another policy, each business owner gets their own policy and would pay the premiums individually.

They would be responsible for individually finding an insurance provider, ensuring all the correct information is passed on.

In the event the shareholder died, the payout from the policy would then go to the remaining shareholders to buy back the shares.

This type of policy is usually suited more to a business with just two shareholders as the disbursement of the payout could get complicated with larger numbers.

It’s worth noting that because the individual shareholder is paying the premiums, they will be paid out of taxed income - so they can’t be used for tax breaks.

Shareholder protection in trust

With this option each shareholder has their own policy and pays the premiums themselves, but the policies are written into a business trust (with the shareholders named as the recipients).

If one of the shareholders dies, the trust pays out equal sums to the remaining shareholders so they can purchase the shares.

Like a life of another policy, because the shareholders pay the premiums out of their taxed income, they can’t be used for tax purposes.

There’s more information about why putting shareholder protection insurance into a business trust can be beneficial in this blog.

Business owned shareholder protection

The final option is for the shareholder protection insurance to be bought, owned and paid for by the business itself.

Under the option, the premiums are paid through the business, and any payouts from a claim are paid directly to the business for the purpose of buying back shares.

Because the policy is owned by the business, the premiums can be treated as an allowable expense, so this can be a more tax efficient way of getting shareholder protection insurance for the business.

However, the insured shareholders premiums, paid by the company, will be treated as taking a benefit in kind (a monetary benefit that’s not part of their regular income) so they’ll pay income tax on the premiums.

What you need to set up Shareholder Protection

Whichever type of shareholder protection insurance you decide to take out, the process of obtaining the insurance will be the same.

And you’ll need to have the same information for each shareholder so a provider can decide on the cost.

The main information you’ll need for each shareholder is their:

  • Age

  • Current lifestyle (are they a smoker for example)

  • Details of any pre-existing health conditions

The answers to these questions will then determine the cost each shareholder will pay.

Get the right shareholder protection with Rigby Financial

Choosing the right type of shareholder protection insurance is a big decision.

If you’re not sure which option is best for your business, or need more information about shareholder protection, then get in touch.

We’ve got a team of expert’s who’ve helped hundreds of businesses find and set up shareholder protection to provide peace of mind and make sure the business is prepared to deal with the worst case scenario.

Get in touch with us today for more information.