Shareholder protection insurance is a policy many organisations will implement to help minimise the risks associated with their shareholders passing away. This insight aims to help you understand shareholder protection, the benefits, the risks of not having it, and how to find the right policy for you.

What is shareholder protection insurance?

Shareholder protection insurance is a policy many organisations will implement to help minimise the risks associated with their shareholders falling critically ill or passing away. This insight aims to help you understand shareholder protection, the benefits, the risks of not having it, and how to find the right policy for you.

Shareholder protection insurance at a glance

Shareholder protection insurance is designed to set out a legally binding plan of what happens to shares when a stakeholder falls critically ill or passes away.

The policy will determine who can purchase the shares and the amount they can take ownership of. Shareholder protection will also provide the financial means for remaining shareholders to buy said shares to ensure a smooth transition.

What’s the role of shareholder protection insurance?

Shareholder protection aims to reduce the risk of a company being taken over by other parties and provides security to other holders by ensuring they have enough funds and the option to purchase shares. In short, its role is to legally bind all shareholders to a set of rules on what should happen as a result of a critical illness or death.

What are the benefits of shareholder protection insurance?

Shareholder protection insurance aims to provide stability and security to all company shareholders by reducing the risks associated with company ownership in the face of death or critical illness. How your company benefits wukk depend on its unique set-up and what you’re looking to gain from a policy, but an example of how you may benefit includes:

• Continuity - The company can continue to be run by the existing shareholders without the risk of new owners entering into the business and trying to make changes that do not align with the remaining shareholder's visions and beliefs.

• Fairness - All covered shareholders must agree upon shareholder protection and ensures there's a fair system in place that everyone agrees to, such as allocating a set amount of shares to family members but selling the others to existing shareholders.

• Financial protection - Shareholders may not have the funds to purchase the shares of their critically ill or deceased partners. Having this policy in place will ensure they have the available funds needed.

• Protection of assets - Shareholders may rely on the value of their shares for financial security, and a change in business ownership may pose a risk to their assets.

• Security - Shareholder protection insurance ensures that all invested parties have the security of knowing what happens and that they're protected following a death or critical illness. This allows them to plan for their future and may give them the security and peace of mind needed as a shareholder.

• Legal protection - All shareholders must sign shareholder protection insurance and its terms are legally binding, providing a layer of protection for all parties.

• Flexibility - Shareholders can adjust the policy terms to suit what they all agree to. No one policy fits all, so your business can create terms specific to the shareholder's needs.

What are the disadvantages or risks of not having shareholder protection?

Not having a policy such as shareholder protection in place may present many risks, such as:

• Financial strain - Surviving shareholders may struggle to raise the funds they need to purchase any shares that are made available due to a critical illness or death. This may result in a risk of taking on debt or other parties purchasing the shares.

• External control - Without shareholder protection in place, company ownership may end up under the control of new individuals that are not aligned with the company's values or objectives, leading to potential conflicts.

• Operational disruption - The departure of a shareholder may lead to disruption that affects the day-to-day operations of a company. This may be due to shareholders needing more time to make organisational decisions due to resolving conflicts or a shift in ownership leading to widespread changes.

• Disputes - Without a shareholder protection policy in place, disputes and disagreements may disrupt company operations. Disputes may be between other shareholders, family members or any other stakeholder.

• Loss in value - If there isn’t a smooth transition in share ownership, this may have adverse consequences that cause the company to lose value temporarily or permanently.

When does shareholder protection insurance come into effect?

Shareholder protection can be claimed on in two scenarios:

1. Untimely deaths - If a shareholder unexpectedly passes away, shareholder protection will provide the financial means for remaining shareholders to buy the deceased's shares and keep the company running. There may be terms in place where some shares are also allocated to family members.

2. Critical illness - If a shareholder becomes critically ill, they may need to exit the business and step down from their responsibilities. In this instance, shareholder protection will provide the necessary funds to cover the transfer of ownership.

What happens when a claim is made?

When a shareholder protection policy is purchased, a cross-option agreement is created. This agreement outlines what happens for remaining shareholders when a claim is made on the policy.

The agreement ensures that there's a structured and fair transition that all shareholders agreed to at the start of the policy. It will define what happens to the shares, who they can be sold to, whether family members retain any shares, and more.

Is shareholder protection insurance right for you?

If you're a shareholder, you may benefit from a protection policy. They may be particularly relevant for closely held businesses owned by families, partnerships or limited companies where a select group of individuals holds share ownership.

By purchasing shareholder protection insurance, you may ensure that the legacy of your business and the work you personally contributed towards its success is rightly protected in the face of a tragic event.

How much does it cost?

The cost of a shareholder protection insurance policy will vary from company to company and depend on many factors unique to the shareholders, such as:

1. Age
2. Lifestyle
3. Occupation
4. Current health
5. Health history
6. Smoking status
7. Alcohol consumption
8. Family medical history
9. Company valuation
10. Number of shares owned
11. Whether critical illness is included

Purchase shareholder protection insurance

For an accurate cost of how much shareholder protection may cost you, we recommend that you speak to an independent advisor who will help you compare your options.

This is a free service we offer, with no obligation to purchase after presenting you with your policy. We'll aim to understand the unique needs of your shareholders and search the market for relevant policies for you to consider. To get started, please complete the form below.