ThinkIFA guide ‘Share Protection Insurance’
Whilst many businesses recognise the importance of insuring stock and buildings they often forget to insure their most important assets, the key people behind the company.
Share insurance protects your business should anything happen to a major shareholder or partner.
Unless you have something in place, should a business partner die or become critically ill then the partnership may dissolve and in the case of a major shareholder, the shares will be passed automatically onto the shareholder’s family who can then assert their right to sell their shares to a competitor or become involved in the business itself.
How Share Protection Works
Share purchase protection ensures that the business has the right amount of funds to buy back the shareholding from co-owners or partners.
Each partner or shareholder in the company enters into a legal agreement regarding the future ownership of the company in the event of the death or critical illness of one of them. This is known as a ‘cross option agreement‘.
Then, should the worst happen, a lump sum is paid out to the remaining partners which enables them to buy that person’s share of the business and it also ensures that the family receive financial compensation.
Share Purchase Agreement
If you work with one or more partners in the business then you have the option of considering a share purchase agreement along with life insurance for each partner.
The agreement stipulates that the partnership would continue in the event of the death or critical illness of one of the partners. Without this agreement in place, the partnership could be dissolved.
By taking out this share protection policy along with a cross option agreement and life insurance you can protect not only your business but the financial security of your business partners and their families.
Shareholder Protection Example
Say there are 4 directors in a company owning 25% of the business and each has life insurance for £500,000 put in trust along with a cross option agreement stipulating that should one of the directors die, their shares can be purchased from their estate.
Upon the death of one of the directors the trust receives £500,000 which allows them to purchase the shares from the family. The remaining directors now have a 33% share and are able to keep control of the business.
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