Losing a key shareholder through critical illness, injury or death can cause big problems to a business. Their shares will pass to their estate and this can result in a number of scenarios that can be potentially damaging to the business.

In once scenario, the shares could end up with a family member who has no interest in the company and so decides to sell to a third party. Alternatively, they might decide they want to play an active part in the business which could be equally unwelcome.

The best way to minimise this risk is to invest in shareholder protection insurance – and if this is something you’re considering, then here’s everything you need to know.

What is shareholder protection insurance?

Where a company has multiple key shareholders, succession planning becomes very important in order to provide the company with stability when a shareholder passes away and their holdings are passed to a family member.

Shareholder protection insurance provides a way for business owners to reduce their risk by ensuring a sum is available to be used by remaining shareholders in order to purchase the equity when one shareholder passes away or becomes critically ill or injured so severely they can’t continue to work (depending on the policy).

The key benefits of shareholder protection insurance

There are a number of important benefits to investing in shareholder protection insurance:

• Peace of mind for shareholders that they’ll have the funds available to purchase the equity of a partner who passes away, without the need to save or use existing company savings • Peace of mind for family members that they’ll be able to sell their equity at a fair and previously agreed price • Business stability – ensuring the continued smooth running of the business even when a key shareholder passes away. • Reduces the risk of business equity being passed on to a disinterested party or being sold to a competitor

Different types of shareholder protection insurance

Own life plans

Each shareholder takes out their own life plan for the value of their shares and it is written as a business trust to ensure that when one dies, the remaining shareholders will receive a payment to allow them to buy their shares.

Life of another plans

This is commonly used when there are two shareholders in a company. Each can take out a policy to insure the life of the other for the value of their shares. When one shareholder dies, the other will receive a payout which will allow them to buy the shares from the deceased shareholder’s estate.

Company share purchase insurance

Here, it is the business which takes out the insurance policy for each of the shareholders. The company then receives the payout. In this instance, the company can declare the insurance premiums as a business expense, but the insured shareholder will need to pay income tax as the recipient of a benefit in kind.

How to find the right cover

Knowing which cover to choose can be tricky and we’d definitely recommend speaking to an expert who will be able to advise you on which option is best for your specific situation. Here at BB Mortgages we’d be happy to chat to you and we offer free consultations with one of our expert advisers.