Glossary · UK
What is Shareholder Protection Insurance?
Life insurance taken out by business co-owners so that, if one dies, the surviving shareholders have funds to buy their shares from the family, keeping control within the business.
Full Definition
Shareholder protection insurance is a form of business life insurance where each shareholder or company director in a privately owned business is insured for an amount roughly equal to the value of their shareholding. If one shareholder dies, the policy pays out to the surviving shareholders (or sometimes to the company itself, depending on the structure used), giving them the funds to buy the deceased's shares from their estate at a fair value, usually under a pre-agreed cross-option agreement (also called a double option agreement). This protects the surviving owners from suddenly having an unwanted or unknown third party -- typically the deceased's spouse or children, who inherit the shares but may have no interest in or knowledge of running the business -- become a co-owner, while ensuring the deceased's family receives a fair cash value for the shares rather than being left with an illiquid, hard-to-sell minority stake. It is typically arranged as term life insurance (sometimes written in trust to keep the payout outside the recipient's estate for Inheritance Tax purposes) and is a standard part of succession and continuity planning for owner-managed companies with two or more significant shareholders.