Shareholder protection helps cover your business if a shareholder dies or suffers an illness. Discover more about shareholder protection with our UK-based team.

Shareholder protection insurance enables a cash sum to be paid to the surviving shareholders. Which can be used to purchase the deceased owner’s shares from their family.

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What is shareholder protection insurance?

Shareholder protection insurance is a business insurance policy. Taken out by the shareholders of a business. If a shareholder dies, or becomes critically ill, the plan ensures that funds are made available for the other business owners. They can then purchase the business interest of the deceased/ill individual.

It provides an important safety net that allows companies to plan ahead should the worst happen. This minimises any interruption to the business whilst also compensating the deceased’s family.

How does shareholder protection insurance work?

Shareholder protection insurance works by:

  1. Each shareholder takes out shareholder protection on their own life. 
  2. Each sum insured should mirror the amount of money that the remaining partners would need to buy out their equity in the company. It is advisable that you speak to your firm’s accountant and co-shareholders to agree on each shareholder’s sum insured.
  3. Decide whether to include critical illness cover. This will protect the shareholders if one suffers a critical illness or injury (that’s covered by the policy) and is forced to leave work.
  1. The memorandum of Articles of Association for the business will dictate what happens to an owner’s shares if they pass away. However, we often see that the shares would pass to the deceased owner’s family/ estate. A Shareholder Protection Policy should be coupled with a cross-option agreement for life cover. This will enable the remaining shareholders to buy the shares from the deceased’s family/estate if they wish. For critical illness, a single-option agreement should be completed. This allows for the life assured to force the remaining shareholders to buy their shares. It does not allow the remaining shareholders to force the life assured to sell their shares. As they may plan on returning to work once they have recovered from the critical illness. Please note that advice relating to a cross-option agreement will necessitate the referral to a service that is separate and distinct from those offered by St. James’s Place
  1. If each policy is paid for by the individual, it will be taken from their own bank account via direct debit. If the policy is paid for by the company the premium will normally be taxed as a benefit in kind.
  2. If a shareholder dies or suffers a critical illness, a claim is submitted to the insurer.
  3. The subsequent payout can be used to buy the deceased’s shares from their family members. Ensuring the remaining shareholders retain total control of the business. Or, buy out the critically ill shareholder if they choose to leave the business.

Why does shareholder protection matter?

Shareholder protection matters from two very different points of view

It matters to the deceased’s family:

  • They have the peace of mind that they will receive a fair value for their shares when their loved one dies.
  • They don’t feel that they have to get involved in a business that they know nothing about it or have no interest in.
  • The shareholder has peace of mind that their family will be taken care of and that there will no squabbling after they have died.
  • That if the life assured suffers a critical illness such as stroke. The life assured can force the remaining shareholders to buy their shares if desired.

It matters to the business:

  • The business will go through minimum disruption during the transition.
  • Funds will be available to buy the shares, no loans, and no liquidation of assets to find funds quickly.
  • No unwelcome beneficiaries entering the business. The remaining owners retain total control of the business.
  • The deceased’s shares won’t be sold to a rival.

What does shareholder protection cover?

Shareholder protection covers the lives of shareholders. It is possible to include Critical Illness cover. So that if the life assured suffers a stroke for example, then the life assured can force the remaining shareholders to buy their shares if desired. Find out more about Critical Illness Cover.

  • It is vital to ensure an appropriate cross option agreement (sometimes called a double option agreement) is in place. This will enable the living owners to buy the shares from the deceased’s family/estate if they wish. It also allows the deceased’s family/executors to force the sale of shares to the remaining owners if they so wish.

    Please note that advice relating to a cross-option agreement will necessitate the referral to a service that is separate and distinct from those offered by St. James’s Place

  • Automatic accrual is for Partnerships and LLPs only, here we look at how it works: 

    • How does it work? 

    On the death of a partner, their share automatically passes to the remaining partners under an agreement entered into by the partners.

    As a result, each partner may wish to purchase a policy to compensate their families who may otherwise not be compensated.  Variable Discretionary Trusts may be used. These ensure that the proceeds remain outside of the estate and can be accessed immediately in the event of a claim.

    Trusts are not regulated by the Financial Conduct Authority.

     

    • How is the arrangement taxed?

    Where Business Relief applies there will be no IHT when the business interest passes to the surviving partners. Premiums are paid by each individual from their taxed income.

    The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.

  • A buy and sell agreement is different to a cross option agreement. If a buy and sell agreement is entered into upon the death of one shareholder, the remaining business owners must buy the interest in the business and the estate must sell. 

    However, any Business Relief would be lost because it is treated as a binding contract for sale.

    Please note that advice relating to a cross-option agreement will necessitate the referral to a service that is separate and distinct from those offered by St. James’s Place

  • A life of another plan is an insurance policy taken out on the life of an individual, but paid for and owned by another. 

When should you take out shareholder protection insurance?

If you are part of a multiple shareholder business and do not have the funds to hand to purchase any share of the business outright you should take out a shareholder protection insurance.

You may also need to consider it if you want to have control over the choice of who joins your partnership should the worst happen to you or your partners. 

The legal agreement in place – a cross option agreement – will confirm the future of the business in shareholder hands and not the deceased’s family.

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What are the benefits of having shareholder protection?

The main benefit of having shareholder protection is to maintain the stability of the company at a difficult and uncertain time. Other benefits of shareholder protection include:

  1. If a shareholder dies without a policy in place their stake in the business could be inherited by an inexperienced family member or end up being sold to a rival.
  2. Creating a smooth transition of shares changing hands, minimising disruption to the business
  3. The insured person’s beneficiaries will be prepared and know the amount they will receive from the sale of their company shares. Minimising any arguments or concerns over their worth.

4. Protecting the business’s savings that would otherwise be raided to buy out the deceased’s shareholder’s stake.

5. The insurance payout also removes the need for the remaining shareholders to take out a loan to buy out the deceased’s stake. 

6. For smaller businesses, shareholder protection is vital. Raising the funds at short notice to buy out the deceased’s share may not be possible, jeopardising the survival of the business.

Here are some popular questions asked by our clients:

  • Shareholder protection is worth it if:

    • You will not able to raise buy out capital at short notice
    • You do not want the deceased’s family to be involved in your business
    • You do not want the deceased’s family to sell the shares to an unknown party or rival
    • You do not want to sell off company assets, use company savings, or take out a loan to buy back the deceased’s shares

  • There isn’t a ‘one size fits all’ answer when looking into how much shareholder protection you need. In most cases, it would be best practice to contact your accountant/auditor or an expert valuer. 

  • There is no one best provider for shareholder protection. It is advisable that you should seek professional protection advice rather than approaching insurers directly. This way you will be given bespoke advice and realistic premiums for your business. Comparison tables will provide you with figures, but which is the ‘best’ is always relative your individual company circumstances. 

  • For shareholder protection insurance, the term can be for as long as the shareholder is expected to be involved in the business. This could be until retirement, or for a fixed period of time agreed by the shareholder.

  • You need a shareholder protection policy if you are part of a multiple shareholder business and do not have the funds to hand to purchase any share of the business outright. You may also need to consider it If you want to have control over the choice of who joins your partnership should the worst happen to you or your partners.

  • You will need an accountant’s valuation to calculate the value of the business. From here the sum insured of shareholder protection can be calculated.

  • Critical illness cover is a good idea to get with shareholder protection. So that if a life assured suffers a stroke, for example, the life assured can force the remaining shareholders to buy their shares if desired.

  • Payment of the premiums will depend on the nature and terms of the arrangement. When we understand more about the structure and requirements of the business, we can provide more information.

    The premiums are collected by monthly direct debit. An annual direct debit payment is also usually an option.

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Is shareholder protection worth it?

Shareholder protection is worth it if:

  • You will not able to raise buy out capital at short notice
  • You do not want the deceased’s family to be involved in your business
  • You do not want the deceased’s family to sell the shares to an unknown party or rival
  • You do not want to sell off company assets, use company savings, or take out a loan to buy back the deceased’s shares

How do I set up a shareholder protection policy?

It is simple to set up a shareholder protection policy:

  • Your Future Proof adviser will take you through detailed fact-finds.
  •  Pre-underwrite any individuals if there are any pre-existing medical conditions.
  • Provide you with realistic quotes from sympathetic insurers based on this. 
  • You will be assisted in completing the application over the telephone. 
  • Any GP reports or medical reports will be chased up by the Future Proof team.
  • Your policy will be placed on risk and relative cross option/ single option agreements will be provided to be completed.

What factors affect the cost of a shareholder protection policy?

The factors that affect the cost of a shareholder protection policy are the same that would affect a personal life or critical illness policy:

  • Age
  • Weight – overweight/ underweight?
  • Lifestyle – smoker? Units of alcohol per week?
  • Occupation – sedentary? Overseas travel?
  • Policy length – 30 or 40 years?
  • Medical history – pre-existing medical conditions?
  • Amount of cover – a high sum insured?
  • Family medical history – History of inherited diseases?

Your Future Proof adviser will be able to search the market armed with the above details. They will get a strong idea of what insurers would offer based on the answers and present the most cost-effective to you. Saving you time and money.

How much does shareholder protection cost?

The table below illustrates Shareholder protection costs.

The premiums quoted are monthly premiums.

Please note that any premiums mentioned are indicative only and based on this specific case study/ example, which is shown for information purposes only. Premiums shown are an average of the 5 cheapest insurers. Your own circumstances will determine whether the amount payable is more or less than the figure quoted.

The monthly premiums below are based on a male, Non-smoker, term length to age 60, and Level term not including critical illness. Quotes provided August 2024.

Sum assured in £sClient agePremiums per month in £s
£250,00040£14.11
£600,00040£30.19
£250,00050£22.74
£600,00050£50.85

How do I get a quote for a shareholder protection insurance policy?

In order to get a quote for a shareholder protection insurance policy aside from personal details, your adviser will ask you:

  1. What is the valuation of the company?
  2. How was this calculated- we will require a valuation from an accountant in support of this
  3. How many directors are there?
  4. What are their shareholdings %?
  5. What provisions have been made within the memorandum of articles of association? This should detail what happens to an individual’s shares in the event of their death. Ie will there be a transfer of shares? If the document restricts the sale of shares it will need amending by the company Accountant.

Shareholder protection and claims

The beneficiary of a shareholder protection policy will depend on how the policy is structured. 

Generally, the proceeds will go to the other business owners to buy the business interest in the deceased/ill business owner. However, in some circumstances where the company itself owns the policy, the proceeds are paid to the business. With both of these methods, the ultimate outcome is the same. 

You would claim on a shareholder protection plan in the same way you would a personal policy. If you have set up your shareholder policy with Future Proof our dedicated claims team will start and handle the claim on your behalf. If you have set it up via another adviser, it would be best to call the insurer directly. Who can handle your claim from there.

Shareholder protection and tax implications

A couple sat at a table with a businessman, shaking hands while looking over documents.

Does shareholder protection have an effect on share value?

No, shareholder protection does not have an effect on share value.

What are the tax considerations around shareholder protection?

There are tax considerations at both ends of the shareholder protection process. The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of tax relief depends on individual circumstances. It is advised that you speak with your tax expert to gain a complete picture.

Shareholder protection – How is the arrangement taxed?

Premium paymentBenefit payment
Own life plans under a Business Trust. Limited Company If the company pays the premium, it can deduct this as a business expense. However, the company may also incur a liability for national insurance contributions. The premium will also be assessed as a benefit to the shareholder for income tax and national insurance purposes. If the individual pays, the premiums will be from their taxed income In both circumstances there will be no IHT payable on the proceeds where the plan is effected as a commercial arrangement. The proceeds of the plan are also paid free of income tax and CGT.
Own life plans under a Business Trust. PartnershipIf the partnership pays, the premiums can be deducted as a business expense unless deducted from the Partner’s capital or loan accounts. If the individual Partner pays, the premiums will be from their taxed income. CGT can arise however if a business share is sold as a result of critical illness. Or for the beneficiaries of the estate where the value of the business has increased since date of death and the date of the sale.
Life of another plans owned by individual shareholders or partners Each business owner pays the premiums from their taxed income. As above.
Company buyback of own shares (Limited Company only) The company pays the premiums which are not eligible for deduction as a business expense. However, there is no benefit in kind for the person covered.The proceeds should not be subject to corporation tax because the plan is being taken out for a capital rather than a trading purpose. It is recommended you seek advice from your own legal/tax specialists.

Here are some frequently asked shareholder protection questions associated with tax implications

  • If the company pays for the Shareholder protection premium, it can be deducted as a business expense. However, the company may also incur a liability for national insurance contributions. The premium will also be assessed as a benefit to the shareholder for income tax and national insurance purposes.

  • Yes, usually under Own life plans, the plan must be issued under a Business Trust for the other business owners. If the company owns the policy then a Trust isn’t usually needed.

    Trusts are not regulated by the Financial Conduct Authority.

  • If paid for by the company the premium for Shareholder protection (taken out on an own life basis) will be assessed as a benefit in kind to the shareholder for income tax and national insurance purposes. It is best to take professional taxation advice.

    The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.

  • With limited liability partnerships, it is usually advised that each Partner take out personal life insurance policies to compensate their families when they die. Premiums are paid by each individual from their taxed income. Take a look at LIFE INSURANCE

Company-specific shareholder protection questions

If a partner or shareholder leaves their business their shareholder protection cover will no longer be required.

All existing plans and/or Trusts and shareholder/partnership agreements in place should be reviewed. It is vital they continue to meet the needs of the remaining shareholders.

Any new shareholders joining the business should be advised to enter into the business protection arrangement. 

Trusts are not regulated by the Financial Conduct Authority.

If your company merges with another, your shareholder protection must be reviewed. It is important that shareholder protection reflects any new agreements. Are there new shareholders? Will some have sold their share? Our qualified protection advisers will take you through the process step by step to keep your cover up to date and fit for purpose for the future.

A small business with multiple shareholders should seek advice in taking out shareholder protection. Especially, if a proportion of the overall value is to be passed onto family beneficiaries. 

Can a relevant life policy be used for shareholder protection?

No, a relevant life policy can not be used for shareholder protection. A relevant life policy should be put in Trust for the benefit of an employee’s family. A relevant life policy will not come with the relevant cross-option agreements that enforce the sale of shares. Take a look at Relevant Life. Trusts are not regulated by the Financial Conduct Authority.

Is key person insurance the same as shareholder protection?

No, key person insurance is not the same as shareholder protection.

Key Person insurance helps protect your business from financial loss in the event of a key member of staff passing away or becoming seriously ill. The policy is owned by and paid for by the business. It covers the life of the Key Person. If there was a claim, the sum would be paid directly to the company. Take a look at Key Person cover.

A shareholder protection policy enables a cash sum to be paid to the surviving shareholders, which can be used to purchase the deceased owner’s shares when accompanied by an appropriate cross-option agreement (sometimes called a double option agreement). Please note that advice relating to a cross-option agreement will necessitate the referral to a service that is separate and distinct from those offered by St. James’s Place. This enables the living owners to buy the shares from the deceased’s family/estate if they wish. It also allows the deceased’s family/executors to force the sale of shares to the remaining owners if they so wish.

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