“What happens if an owner or part-owner of a company dies unexpectedly?“
It doesn’t matter what industry you operate in, it’s important to protect your business with a safety net. Not only does your business effect the livelihood of you and your family, but also those of your employees and stakeholders as well.
A death of a major shareholder can be a hugely damaging event for a business. It can have a serious impact on the day to day running, not to mention the shareholder’s family. More often than not, after a death occurs shares will need to be distributed to family and other beneficiaries who may prefer to cash them in. Meanwhile other shareholders may wish to purchase the shares but not have adequate funds at their disposal. This is where shareholder protection insurance becomes extremely useful.
What is shareholder protection insurance?
Put simply, shareholder protection insurance is designed to ensure that the aftermath of a shareholder’s death is as smooth and stress free as possible. It involves writing up a series of legal agreements that set out how shares are to be managed if a stakeholder passes away.
The benefits of shareholder protection insurance
A safe and stable business plan:
In today’s fierce world of business it’s crucial to ensure a safe and stable business plan. When shareholders die, particularly in small businesses, it’s likely to cause a shake-up in operations and jeopardise the strength and unity of a business. Shareholder protection insurance helps bring peace of mind that should a fellow business owner/investor pass away, funds will be paid out so that remaining shareholders can buy up the deceased’s shares quickly and efficiently.
Support for family members:
Most family members and beneficiaries would rather receive money from their deceased’s shares than have to inherit the responsibility of helping run a business. A business they most likely won’t know too much about. Cash payments from shareholder protection insurance can relieve the stress families’ face when losing a key breadwinner by knowing they will receive financial compensation with a fair buy-out price.
Illness and disability:
With the correct agreements and policies put in place shareholder protection can be used to cover serious illnesses. Giving a sick shareholder the ability to sell shares to remaining shareholders will be a big weight off their mind.
Three main types of shareholder protection insurance
“Life of another”:
This method is usually adopted when a business is run by just two shareholders. If one shareholder dies money is paid out to the surviving policy holder who then uses the funds to purchase the shares from the deceased shareholder’s family or estate.
Company share purchase:
Instead of being paid out by a surviving shareholder the company itself purchases shares back from the deceased shareholder.
“Own life” policy held under a business trust:
This method involves each individual shareholder to take out their own policy held under a business trust. The amount of cover should equal the value of their shares and can be drawn up on a fixed term, or up until retirement. Then should the shareholder die, other shareholders can purchase the deceased shares with the policy pay-out funds.