Shareholder protection insurance is designed to give your business a succession plan should a shareholder become totally and permanently injured, terminally ill, or die.
Each shareholder is insured for the value of their shares, and a buy/sell agreement is drawn up by a lawyer. This sets out in advance what will happen if one of the business owners is removed from the business due to disability, terminal illness or death. It also allows for the seamless transfer of the shares to the surviving shareholders without them having to obtain a loan or sell assets.
It is a type of business insurance, but can have benefits for both parties. It provides a cash payout to the business partner ‘selling’ their shares and helps the remaining shareholders to keep control of the business.
Together with a buy/sell agreement, shareholder protection insurance offers peace of mind for shareholders, staff, and creditors. Having a succession plan set out in advance helps to ensure continuity and helps the business stay focussed on its people.
Ania is a 25% shareholder and partner in a consulting firm worth $1.5M. Three other shareholders also own 25% each.
Unfortunately, Ania unexpectedly dies and because there is no shareholder agreement in place, Ania’s shares pass to her 22-year-old son. The son thinks the shares are worth more than the amount the consulting firm offers, and it takes months of negotiations and working closely with lawyers and accountants to come to an agreement.
With the business finally back on track and the negotiations settled, the remaining shareholders decide to use an insurance broker to arrange business insurance cover.
The broker helps them to arrange shareholder protection insurance and advises them to put a buy/sell agreement in place with their lawyer to help ensure the smooth transfer of shares should one of the remaining shareholders become critically ill or die.
As two of the remaining shareholders are hands-on with the business and responsible for more than 30% of the business’s revenue, the broker also recommends key person insurance.This could provide a cash payout which can be used to find and train a replacement if either of these key people became disabled, terminally ill, or died.
This case study is fictional and does not represent any real-life individuals, events, or organisations.
Why should you choose Marsh to arrange your insurance solutions?
Protect your business against potential losses and issues if a key member of your team is unable to work.
A complete business insurance solution tailored to fit small and medium businesses. Right here. Under one policy.
You may want to consider shareholder protection insurance if your company has more than one shareholder and you would not be able to afford to ‘buy out’ one of the shareholders if they died or became terminally ill.
Businesses with no shareholders, for example, a sole trader, do not need shareholder protection. Similarly, if you run your business with your spouse, your shares would go to your estate – so shareholder protection insurance is unlikely to be needed.
No. Shareholder protection insurance can also cover instances where a shareholder is terminally ill or permanently disabled and cannot return to their position or role.
Your broker can answer questions about specific exclusions.
Shareholder protection insurance is designed to cover the value of the shares if a shareholder dies, becomes terminally ill or permanently disabled.
Key person insurance can cover important individuals in the business who are not shareholders, such as a scientist or a star salesperson. Key person insurance payouts could be put towards the cost of bringing in a replacement, or to cover some of the revenue that is lost as a result of the key person being away from the business.
There is a monthly option for key person insurance, which provides monthly payouts while an insured key person is temporarily unable to work due to serious illness or injury, but intends to return. A lump sum option offers cover for instances where the key person cannot return.
You may wish to consider both key person and shareholder protection insurance as part of your business insurance package. Talk to one of our specialist brokers for more information.
A buy/sell agreement is a legally binding contract drawn up by a lawyer. It details what would happen to an owner’s share of the business if they die or leave the business. This will likely include how the shares will be transferred, how their value will be determined, who can buy them, and in what timeframe.
A buy/sell agreement helps make the transition of ownership a smooth process by providing a pre-agreed plan.
LCPA 24/481
Marsh Limited (NZBN 9429040918792)(“Marsh”) arranges the insurance and is not the insurer. This page contains general information and does not take into account your individual objectives, financial situation or needs. For full details of the terms, conditions and limitations of the covers, refer to the specific policy wordings and/or Product Disclosure Statements available from Marsh on request. This publication is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Marsh shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein. Marsh makes no representation or warranty concerning the application of policy wordings or the financial condition or solvency of insurers or re-insurers. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage.
