Picture this; a key person or shareholder in your business suddenly passes away. It follows that their family inherits their estate, which includes their shares in your company. In that case, it means your company would be partly owned by people with potentially zero knowledge about the business, let alone how to run it. And yet, here they are with a seat at the table and the power to make decisions that can make or break the business.
That’s a tricky situation that no business owner would want to find themselves in. Wouldn’t you agree?
Luckily, there’s a solution! If your business only has a few shareholders, you can take out shareholder protection insurance to protect your company’s interests should the inevitable happen.
What is shareholder protection insurance?
Also referred to as succession planning, shareholder protection insurance is the policy your business needs to facilitate a smooth transfer of shareholding if a shareholder passes away or gets diagnosed with a critical condition. The policy provides a lump sum payout to the surviving shareholders, which they can use to purchase the deceased’s shares from the family.
The goal is to eliminate the chances of a potentially inexperienced family member having influence over the business or selling the shares to the highest bidder without due diligence.
In a nutshell, this policy provides the remaining shareholders with enough funds to recover the shares from the family. This helps to guarantee them the much-needed peace of mind knowing that the company’s interests will remain in safe hands.
How does shareholder protection insurance work?
When taking out the policy, you’ll have to decide the level of coverage needed, which depends on the value of each shareholder’s shares. This helps to foretell how much capital the business will need to buy out the insured shareholder’s equity if they pass away or leave the company due to an illness or incapacitation.
During the application stage, the insurance underwriter will need the insured’s personal information such as age, current health, and lifestyle to calculate the appropriate premium charges. The other factor that may influence the rates is if you choose to include critical illness cover in your policy.
All in all, shareholder protection insurance is one of the most sophisticated covers as it has different ways for it to be set up. If you’re unsure how to set up your policy correctly, don’t hesitate to seek assistance from a business protection expert like Caspian Insurance.
Why take out shareholder protection insurance?
A typical business has several risks that can be addressed through means like property insurance, professional indemnity cover, patents, and trademarks. But the most significant threat that no business cannot afford to ignore regardless of their industry, is the unexpected loss of life of a key shareholder.
Here are some benefits that taking out shareholder protection insurance can bring to your business and beyond (the shareholder’s family):
This policy is the safety net that any business needs to guarantee its perpetual survival regardless of what happens to the stakeholders in the future. If a critical shareholder passes away, the surviving ones can use the policy’s proceeds to buy out their shares without straining their resources or wasting time looking for another investor or raising funds to afford the buyout.
Support the bereaved family
Losing a loved one can cause a lot of emotional distress. It’s not uncommon that the deceased shareholder’s family may not even want anything to do with the business other than the financial support. If that’s the case, then this insurance plan comes in handy with a lump sum payout to settle the family’s wishes quickly, fairly, and transparently.
Support the shareholder (in case of a critical illness)
A company can also take out shareholder protection insurance to protect its shareholders against critical illnesses like heart disease and some stages of cancer. If the insured shareholder gets diagnosed with a chronic condition, the remaining shareholders can distribute the shares amongst themselves. They will then give the deceased family the policy’s payout to provide financial reprieve for the time their breadwinner won’t be working.
If your business is likely to struggle raising enough buyout capital upon the sudden demise of a shareholder, that’s a sign you need shareholder protection insurance. This policy guarantees a smooth transition of shares for business continuity and ensures that the insured person’s beneficiaries receive proper and timely financial support to continue affording their lifestyle.
Do you have any questions or feedback regarding this plan? We’d like to hear your feedback in the comments below!