Shareholders Protection serves as a solution to a common problem that arises when a shareholder in a business passes away, leaving their partner or family to handle their share of the business. This can result in the surviving shareholder(s) being paired with an inexperienced or unwanted new business partner.
In essence, a shareholders protection policy provides a payout upon death, enabling the surviving shareholder(s) to purchase the deceased shareholder’s shares from their estate at a pre-agreed price or based on a pre-determined valuation strategy.
By employing a cross-option or “buy and sell” agreement, all parties involved in the organisation are obligated to follow the agreed-upon process, typically requiring both parties to be in favour of voiding the agreement.
The objective is twofold: the family of the deceased shareholder receives a cash lump sum equivalent to the value of the shares held in the business, while the remaining shareholder(s) maintain control and continuity in running the business.
In more complex cases, variations of this process can be implemented to allow the business to purchase some shares from the estate, while allowing the family to retain a smaller shareholding. This arrangement can provide future income, facilitate a transfer to children, or enable the family to benefit from a future sale of the business.
Share Protection policies are typically structured as life cover-only, as shareholders generally do not wish to relinquish their shareholding in the event of an illness alone (such as a critical illness from which they are likely to recover). However, it is possible to include critical illness cover as part of Share Protection.
Additionally, there are options available that provide a “halfway house” solution, paying out in the event of death or diagnosis of a critical illness. However, these policies typically limit the covered critical illnesses to more severe conditions that are more likely to prevent an individual from effectively returning to work. These policies offer a reduced cost compared to full critical illness share protection coverage.
It is essential to seek advice from a specialist in order to choose the appropriate Shareholders Protection policy that aligns with the unique requirements of the business and the shareholders involved.