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Page written by Chris Godfrey. Last reviewed on September 24, 2024. Next review due October 1, 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.
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.
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.
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.
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
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).
If an insured owner leaves the business their shareholder protection cover is no longer required.
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.
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 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 Wells Fargo Bank, Visa, Experian, Ebay, Flywire, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of US consumer and business finance.
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