Shareholder Protection

‘RISK COMES FROM NOT KNOWING WHAT YOU’RE DOING’ WARREN BUFFETT

We’re willing to insure against many eventualities. The likes of life cover, critical illness cover, and medical insurance are commonplace.

But shareholder protection insurance is often forgotten about. Shareholder protection is essential to ensure that your business can carry on in the event of either the death or critical illness of a shareholder. Yet according to a recent survey, 58 per cent of businesses have no formal agreement in place detailing what would happen if the business owner died.

The safety net that shareholder protection provides will make sure that at a time of loss, there won’t be the added stress of uncertainty for the future of the business.

What is shareholder protection insurance?

In the event of a shareholder’s death or critical illness (depending on the type of cover), shareholder protection insurance provides the capital needed to enable the remaining shareholder(s) to buy the shares. The aim is not just to ease potential financial difficulties, but to preempt what will happen to the shares.

In practical terms, legal documents are compiled detailing how the shares are to be managed, and who they will be passed to. Either the shareholders, or the company as a whole, can take out insurance on the lives or health of each of the individual shareholders. Pay-outs from the policy can then be used to buy the shares from the deceased.

This can massively benefit the family members and fellow shareholders of the deceased or critically ill business owner. By supplying the funds necessary to purchase the shares, the insurance will help smooth over what could otherwise be a difficult transition. It could be the difference between keeping the business running, and seriously jeopardising it’s future. If the shares of the deceased pass to family members, they may have no interest and sell them on. Or they may become involved in the running of the business, even if they have no experience. Both of these situations could be potentially disastrous for the other shareholders and employees of the business. Shareholder protection will pay-out the family members the value of the shares, so they are properly compensated, without disrupting the business.

If you are interested in shareholder protection insurance, or critical illness cover, please contact the Hartsfield team.