Shareholder or partnership protection enables company directors to purchase business shares from a fellow director's family should he or she die and/or suffer a critical illness which stops them participating in the business.
This form of protection is generally available to individuals who are in business with others in a limited company or a partnership. It enables policyholders to retain control and ownership of the firm should the worst happen. Combined with a properly written shareholder agreement, which will ensure the existing shareholders get first refusal when the shares are offered for sale (preventing them from ending up in competitor's or other unwanted third party's hands), the insurance provides the lump sum to allow them to make that purchase at a fair value for all concerned.
There are a number of ways to go about taking out insurance. It can either be written on a 'life of another' basis, where each principal takes out a policy on each of the others. This is popular when there are just two partners involved in a business but can get complicated for three or more partners. It can also seem unfair if age difference between partners is significant as the cost of insurance for the older age will be much higher.
When there are three or more partners, therefore, the more common approach is for each partner to write a policy on their own life and then place it in trust for the benefit of the company itself. The remaining shareholders can then use the funds received by the company to purchase those shares and redistribute them amongst themselves.
In most cases, a level term assurance policy is used which covers each individual to retirement age, although it may also contain a conversion or extension option to add some flexibility. However, there is also merit in considering an element of increasing term assurance, since the value of the business may rise considerably and, at the very minimum, a degree of 'inflation proofing' at the outset can save time and effort in the future.
In addition to the basic shareholder protection, business protection might be extended to cover directors' loan accounts so that money is always available to cover the company's liability. Alternatively, keyman insurance might help support a business should anything happen to particularly valuable employees. As with all forms of insurance, both corporate and individual, however, the area can get complicated very quickly and it is wise to seek professional financial advice.
Mark Taylor Cert PFS, IM Financial Solutions Ltd.
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