Shareholder protection insurance

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Page written by Chris Godfrey. Last reviewed on September 21, 2024. Next review due April 6, 2025.

Shareholder protection insurance can provide your business with a financial safety net if it ever lost a shareholder through serious illness, injury or death. This may be a scenario that nobody likes to think about, but it is still important to plan for. If a shareholder were to die without insurance, their stake in the business could be inherited by an unwelcome beneficiary or end up being sold to a competitor. Shareholder protection insurance can eliminate this problem, ensuring a smooth transition during the transfer of ownership and maintaining business continuity.

Read on to find out more about this important business protection.

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What is shareholder protection insurance?

Shareholder protection insurance, also known as business protection cover, is a type of business insurance. It provides company shareholders with the necessary funds to buy shares from each other if one of them was to die or was unable to work due to a serious illness or accident. Most policies are life insurance-based but critical illness cover can also be included at extra cost.

What is critical illness cover?

Critical illness cover is an insurance that pays the insured a lump sum if they are diagnosed with a certain type of illness. The kind of illnesses that are covered are usually long-term, very serious, or even terminal conditions such as heart attack, stroke, cancer, loss of limbs, MS, or Parkinson’s disease.

How does shareholder protection insurance work?

Shareholder protection insurance with critical illness cover is designed to support small and medium sized businesses. It pays out if a shareholder dies or is diagnosed with a terminal illness (life expectancy of less than 12 months) during the term of the policy.

Although the untimely death of a business owner is never welcome, it can happen, and when it does it can cause problems for the surviving shareholders. A common issue is that the deceased’s spouse, partner or other beneficiaries inherit the shares, but may have a more immediate need for money.

In contrast, the surviving shareholders may want to buy the shares from the beneficiary but do not have the cash to do so. Shareholder protection insurance can bridge this financial gap, providing the funds to help the surviving business owner(s) purchase the deceased shareholder’s interest in the firm and retain control of the business operation.

What are the benefits of having shareholder protection insurance?

Provides the funds to help the surviving shareholders purchase the shares of the deceased business owner
Helps the surviving shareholders to retain control of the business
Prevents the sale of the deceased’s shares to hostile parties or competitors
Helps to maintain business stability and continuity
Quickly provides the deceased’s spouse, partner or other beneficiaries with a ready buyer for the deceased’s shares and the immediate funds they need

How much shareholder protection insurance do you need?

The sum insured is usually based on the estimated amount of capital the remaining shareholders would need to buy the shares of their deceased colleague. As a rule of thumb, this calculation is based on the net equity value of the company divided by the number of issued shares. If the deceased owned 50% of the shares, it would typically require 50% of the total net value, plus any consideration for business goodwill and other variable factors, to purchase those shares.

Example:

Net equity value of the business: £1,000,000

Deceased share ownership: 50%

Base sale price of deceased shares: £500,000

Plus: Consideration for goodwill and other variable factors

What affects the cost of shareholder protection insurance?

Premiums for shareholder protection insurance will depend on the insured person’s age, lifestyle and whether they have any pre-existing health conditions. For example, a business owner in their 30s with a clean bill of health who doesn’t smoke would likely generate a lower premium than the same policy for somebody in their 60s who smokes and has a history of heart disease. Costs will also increase if you decide to include any extras, such as critical illness cover.

Ultimately, because every organisation needs shareholder protection policies that are customised to fit the individuals they wish to insure, it makes sense to compare different offerings from different insurers before making any purchase. (You can start the process here).

What happens to a shareholder protection policy if an owner leaves?

If an insured owner leaves the business their shareholder protection cover is no longer required.

Do you need shareholder protection insurance as well as critical illness cover?

It depends on the level of protection you think the business needs. Buyers of shareholder protection insurance will have the option to purchase critical illness cover as an addition. Although policies with critical illness cover can be more expensive, they can offer more protection for the future of the business – paying out if the insured dies and/or is unable to work because of terminal illness. Shareholder protection insurance without critical illness cover will only pay out upon the death of the insured.

How Swoop can help

Don’t let the death of a key shareholder cause hardship to their dependents and impact your business. Contact Swoop today to compare top-quality shareholder protection cover from a range of insurers and to discuss all your business insurance needs.

Written by

Chris Godfrey

Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Barclays Bank, Metro Bank, Wells Fargo, ABN Amro, Quidco, Legal and General, Inshur Zego, AIG, Met Life, State Farm, Direct Line, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of consumer and business finance and insurance.

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