Share Protection Insurance

Share protection insurance (also known as shareholder protection insurance) is a type of business life insurance that safeguards a person’s share in a business and the business itself, in the event that a shareholder suddenly dies or becomes terminally or critically ill.

Should this situation happen, would your business have sufficient funds available to buy a deceased shareholder’s share(s) outright or could the death of an unprotected shareholder leave your company vulnerable?

What is share protection?

Share protection means that, should a shareholder die or be diagnosed with a terminal illness (with a prognosis of 12 months or less to live), then a cash lump sum will be paid to the business’s surviving shareholders by the insurer.

Share protection can include additional cover for a critical illness - such as cancer, a heart attack or a stroke - of a shareholder whereby a cash lump sum is similarly paid out to a company in the event a shareholder becomes critically ill.

Share protection means that should the worst happen, your company can smoothly continue operating and trading, giving peace of mind to all shareholders.

Benefits of Shareholder Protection Insurance

The key benefits of a share protection agreement are:

• it pays out a cash lump sum to the surviving shareholders in a business.
• it enables remaining shareholders - shareholders can be directors of a private limited company (PLC), partners in a partnership or members of a limited liability partnership (LLP) - to be able to afford to buy the deceased shareholder’s share(s) from the deceased shareholder’s estate.
• it helps the deceased shareholder’s spouse, partner or other main beneficiary in the deceased shareholder’s Will gain more timely access to a useful cash lump sum instead of inheriting a potential unbeneficial, undervalued share in a company they have no interest in.
• it helps remaining shareholders (directors, partners or members) maintain complete control of their business.
• it protects a business from vulnerability - for example, due to lack of funds, without a share protection arrangement the remaining shareholders may have to reluctantly allow an eager competitor to buy the deceased shareholder’s share in a business which could have disastrous consequences such as a takeover bid.
• there is usually no inheritance tax (IHT) payable: if all shareholders participate there should be no Inheritance Tax on the premiums payable (but there can be some - typically negligible - inheritance tax implications for the deceased shareholder’s estate).
• there is no need to save up capital, use savings or seek to borrow money to buy the share(s).

Note: All shareholders of a protection arrangement should write a Will to ensure they qualify for a potential 100% business property relief for IHT purposes.

What affects the cost of Shareholder Protection Insurance?

The cost of shareholder protection insurance can be affected by:

• the sum assured (i.e. the amount paid out)
• the level of cover (i.e. the amount of capital required to buy the shares which is usually determined by a consultation with all fellow shareholders and the business’s accountant)
• the policy’s term (the shorter the term, the cheaper the premiums although a term can be for a period of 40 years or more)
• the inclusion or exclusion of critical illness cover (this is an optional extra that will bump up the cost)
• a business’s particular circumstances and requirements (it’s not a ‘one size fits all’ with share protection cover and different insurers and their policies will suit some businesses more than others)
• the insured shareholder’s: age, pre-existing medical, conditions, lifestyle choices (i.e. adrenaline seeking, high risk sports), smoking status