Shareholder protection: Which one do you need?

Investing in shareholder protection insurance can ensure your business has the funds available to buy back any shares that leave the company in the event a shareholder dies or becomes too ill to continue in the business.

Without shareholder protection insurance in place, there is no guarantee those funds will be available, even if there is a shareholders agreement in place stating that shares must be sold back to the business in the event of a death.

But how you set up your shareholder protection will depend on your individual business and not every option is right for every business.

In this guide we’ll go through the types of shareholder protection insurance you can use to ensure your business is prepared for any eventuality.

1. Life of another policy

With life of another policies, each shareholder owns an insurance policy but the policy covers another one of the shareholders.

For example shareholder A has a policy on shareholder B and vice versa.

In the event of a death, the deceased’s policy pays out to the remaining shareholder or shareholders.

While this type of shareholder protection can be used for any business with shareholders, it’s usually only used for businesses with two shareholders.

This is because under this type of insurance the reallocation of outgoing shares to those remaining shareholders can become quite complex the more people that are involved.

Also, unlike some other types of shareholder protection insurance, because individual shareholders pay the premiums on the policy themselves out of their taxed income, life of another policies can’t be used for any tax advantages.

2. Own life insurance

An own life policy is similar to a life of another policy in that each shareholder owns and pays into an individual insurance policy.

However, with an own life policy, the shareholder who owns the policy is also the named person on the policy, and they’ll name the other shareholders as the recipients of any payouts.

The other shareholders will then use the pay out to purchase shares from the deceased shareholder’s estate.

3. Business owned shareholder protection

In this scenario the shareholder protection will be bought, owned and paid for by the business – rather than the individual shareholders each owning their own or separate policies.

With a business owned policy, the policy premiums will be paid for through the business. The business will also receive any payouts that are made following a death or illness, with the proceeds going towards buying back any outgoing shares.

Having a business owned insurance policy can have some other financial benefits too.

For example the premiums can be classed as an allowable expense on the annual tax return, so it can be a more efficient way of getting shareholder protection.

But, the premiums will be treated as a benefit in kind, so the shareholders will pay income tax on the premiums.

Putting your shareholder protection insurance in a business trust

If you choose to take out shareholder protection insurance, it’s recommended that you place the insurance into a business trust – regardless of whether the policies are business owned or owned by the individuals.

Writing shareholder protection into a business trust can make any payouts more tax efficient, especially when it comes to inheritance tax.

Under the rules of the trust, the individual shareholders will be named as the recipients of the payouts and will receive equal sums to fund the purchase of any outgoing shares.

However, while writing shareholder protection insurance into a trust can make the payout more tax efficient, the individual premium payments are paid for using taxed income so don’t offer any tax advantages.

Protecting your business with the right type of shareholder protection

Ensuring your business is protected in the tragic event that a shareholder dies is an essential part of your continuity planning.

The type of business you have could determine the right type of protection insurance you invest in.

The best thing to do is talk to a professional insurance broker who can advise you on the best course of action for your business.