Should you have Shareholder Protection Insurance?

Shareholder protection insurance is a type of life insurance policy that provides funds to the remaining shareholders to buy out the shares of a deceased or critically ill shareholder. Without such protection, the shares might pass to the deceased’s family or estate, which could create operational complications, disputes, or even force a sale of the business.

Companies typically structure such insurance through one of three policy models:

• Own Life Policy Held Under Business Trust

Each shareholder takes out a life (or life and critical illness) policy on their own life, with the proceeds placed in a business trust. This structure ensures the payout is directed toward buying the deceased’s shares.

• Life of Another Policy

Each shareholder takes out a policy on the lives of the other shareholders.

• Company-Owned Policy (Corporate Shareholder Protection)

The business takes out policies on each shareholder and pays the premiums. If a shareholder dies, the company receives the insurance payout and uses it to buy back the shares.

An essential complement to any shareholder protection insurance is a cross-option agreement (also called a double option agreement). This legal agreement gives the remaining shareholders the option to buy, and the deceased shareholder’s estate the option to sell, the shares.

Shareholder protection insurance is a vital tool for safeguarding the future of a business. Companies that proactively put this protection in place can navigate unexpected challenges with confidence and stability.

Want to Find Out More?

Click here for more information on optimizing shareholder protection generally, or alternatively contact your local Whitings LLP office today.

Disclaimer - All information in this post was correct at time of writing.