Owner's insurance and shareholder protection
If the shareholder or partner is diagnosed with a critical illness, having business share and partnership insurance cover - sometimes called owner's insurance or ownership insurance cover - in place can help the remaining owners/partners buy the affected individual's share of the business.
On the death of a shareholder, some potential conflicts could occur:
- If the shares are sold on the open market, a new business owner could take control of the daily running of the business. Mr Timpson says: "The new owner could be a competitor or completely unsuitable for the business".
- If the deceased owner's family are willing to sell the shares, the surviving owners could have trouble raising the money, or disagreements about the terms of the sale could cause friction.
- Uncertainty over ownership could give lenders, such as banks and other investors, concerns about the viability of the business and they could restructure the firm or cancel any funding.
Protection means while the family of the deceased can still be supported, the business has funding enough to continue.
Moreover, shareholder/partnership/ownership cover can be flexible - as it can include life insurance or life insurance together with critical illness cover.
Either the fellow shareholders or the company as a whole takes out insurance policies on the lives of each shareholder. Should a shareholder die, policy pay-outs can be used to purchase the shares of the deceased holder.
In the UK, there are three main types of this: Life of another, company share purchase and own life policies, held under business trust.
1) The first one, life of another, is usually adopted when there are just two shareholders.
2) Company share purchase enables the business itself, rather than the other shareholders, to buy back the shares.
3) Own life is where individual shareholders take out a policy, held under a business trust. Should a shareholder die, other shareholders can then use policy pay-out funds to purchase their shares.
Obviously each business is different so no one-size-fits-all method applies, but in the interests of protecting the business through a transition when it comes to shareholders, and especially when there’s a long-term succession plan in place, having some form of protection is very useful.
"Losing an owner can have a huge impact on the daily running of the business, and can quickly result in financial difficulties," says Scottish Widows' Mr Timpson.
"Boardroom confusion can lead to conflict in decision making, as the surviving owners and the deceased's family may have very different ideas about the future of the business.
"I recommend advisers review their client's protection requirements regularly to take into account any changes in business value or shareholding."
Of course this won't be applicable to all: "For an adviser meeting a client that runs a start-up business, share protection is unlikely to be relevant to their needs," says Mr Kateley.
This is why the role of an adviser is so important, to make sure the client gets not just protection, but the right sort of cover.
simoney.kyriakou@ft.com
