Shareholder Protection Insurance

What is shareholder protection insurance?

Shareholder protection insurance ensures that the remaining majority shareholders in a business have the means to buy the shares of a deceased shareholder. It’s designed to protect the intended succession/progress of your business by paying out a lump sum to the remaining shareholder(s).

Shareholder protection insurance in layman’s terms

In simple terms, shareholder protection is a type of insurance that makes sure there’s money available to buy the shares of a shareholder who has passed away. This means their shares can be turned into cash for their estate, helping to settle their affairs more smoothly. 

For the remaining shareholders, this brings peace of mind. They won’t have to worry about an unexpected new shareholder joining the business – like a family member of the deceased – or having to negotiate a sale under pressure. Instead, the shares can be bought back in an orderly and planned way. 

Some plans include coverage just in the event of death, whilst others may also pay out in the case that a shareholder becomes critically ill. This benefits the deceased shareholder also as it ensures that families who depend on them will have willing and capable buyers.  

What is the difference between key man and shareholder protection insurance?

Key person life insurance differs from shareholder protection insurance in that key man life insurance covers the financial loss of a company when a key shareholder or employee dies, whilst shareholder protection ensures that surviving shareholders can buy the shares of a dead or critically ill person. 

Considering that both plans refer to an important member of a business, people sometimes get the types of insurance confused, so make sure to talk to the Dragonfly Crowd team to outline exactly what you’re after, so we can find the right deal for you.

Types of shareholder protection cover

There are a couple of types of shareholder protection cover which you should understand:

• Life insurance – A plan is taken out to cover the value of the shareholder’s shares, so that the remaining shareholders can purchase them in the event of death.

• Cross-option agreements – Often used alongside life insurance, this plan obligates the deceased party to sell, or the remaining shareholders to buy if either party triggers the obligation. This is usually valid for a two month period after the death of the insured shareholder.

How does shareholder protection insurance work?

Shareholder protection insurance works by paying a lump sum of money to the remaining shareholders in the event that a current shareholder dies. This allows them to buy the remaining shares and keep the business running as intended. 

Some plans extend this payout to the diagnosis of a critical illness (usually with less than 12 months to live), but you may have to pay extra for that. 

To take out this insurance type, you’ll normally pay a monthly or annual premium for a fixed period, which means you are covered for that period. 

What you need to set up shareholder protection insurance

To set up shareholder protection insurance, you need to determine the level of cover you need (do you wish to include critical illness in your plan?) and usually speak to an accountant to understand exactly how much each holders’ share is worth. 

You’ll need to take out a plan for each shareholder, ensuring that if any single one dies, the rest are covered. You’ll also need accurate health information and to be honest about your lifestyle situation, so that we can find the right plan which best suits you.

Why take out shareholder protection insurance?

You should take out shareholder protection insurance to maintain control over your business and/or ensure correct succession. Without doing so, you risk unwanted beneficiaries buying out shares and taking control. 

It also facilitates the smooth transition of ownership in the event of death, which is financially covered and ownership passes to the correct party/person. Shareholder protection insurance is often used to plan the future ownership of a business in the event of death.