Shareholder protection insurance is designed to protect the business against the risk of exposure to unwanted outside involvement should a key shareholder die, become critically or terminally ill. Shareholder protection should be put in place alongside an agreement between the shareholders (known as a cross-option agreement) which sets out the steps taken if a shareholder passes away. It facilitates the sale of their shares to the other shareholders and the insurance provides the funds they need to purchase them from the estate of the deceased or seriously ill shareholder. The agreement will usually state an agreed valuation for the shares in advance, in order to determine a figure for the sum insured and, therefore, the amount paid in the event of a claim.
The primary difference between key man cover and shareholder protection is who receives the payment. Key person insurance provides a lump sum to the business and is necessary to get the business back on its feet, to recruit a new member of staff, to provide security to creditors, and any other costs which may be incurred due to the loss of a key individual. Shareholder protection ensures the families of the shareholder inherit the value of their shares, and the control of the business is secured by the purchase of the shares for the remaining shareholders.
Whilst there is no tax relief on the premiums paid for shareholder protection as premiums paid by the business cannot be classed as a business expense, the payment of the sum insured will be tax-free. It’s important the shareholders pay the premiums for this treatment to be applied because if the company pays the premiums, it could be treated as a benefit-in-kind (P11D) upon the policyholders and if the payment is made to the business, the payment could be treated as a business receipt and potentially liable to corporation tax. Therefore, it is important to get advice and make sure the arrangement is set up correctly or it could have costly consequences.