by Charlotte Higgins

What is shareholder protection insurance?

This type of insurance is intended to pay out upon the death or critical illness of a shareholder and can be taken out by a company or an individual shareholder.

In the event a shareholder dies or suffers from a critical illness, the policy will pay out a sum of money to ensure the remaining shareholder(s) can purchase the shares from the deceased’s estate.

The benefits include:

  • Ensuring existing shareholders can continue to run the company, but also the deceased family will receive an appropriate pay out for the value of the shares, and the responsibility of the shares is returned to the existing shareholders.
  • The company has a fail-safe in order to pay for the shares taking the worry out of how it would finance the purchase of the shares.
  • Tax exemptions.

Which policy is appropriate?

There are several different ways to structure the policy, and a reputable insurer or broker should be able to advise you in this respect.

Firstly, the company can take out the policy itself, paying the premiums and owning the policy, with the shareholder being the insured.

The second way is through a ‘Life of Another’ policy. This type of policy is most commonly found in a company that is owned by two shareholders. Each a beneficiary to the other, the premiums of the policy are paid by each of the shareholders individually.

And thirdly, an ‘Own Life’ policy. Each shareholder will take out their own insurance policy, for the benefit of their estate. This means the policy proceeds will be paid directly into the shareholder’s estate.

Who should enter into an option agreement and how does this agreement work?

Cross option agreements are usually entered into by owner managed companies. Providing existing shareholders with peace of mind if a disruption occurs, the agreements carry many benefits to help the company continue to operate.

The agreement will include both Put and Call Options. Both options run consecutively, enabling the surviving shareholders or the company to exercise the Call Option to compel the deceased shareholder’s estate to sell the deceased’s shares to them.

In the event this option is not exercised, the deceased shareholder’s estate will have the right to exercise the Put Option and compel the surviving shareholders or the company to purchase the shares from them, using the proceeds of the insurance policy.

Care should always be taken to seek tax advice as to the implications of cross options, prior to purchasing any insurance policies.

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