Shareholder protection insurance provides shareholders in a business with the financial relief needed to buy back the shares of a fellow partner should that partner fall seriously ill or pass away. It is designed to ensure control of a business remains with the shareholders in the event of a death or critical illness, and that it does not fall into the hands of inappropriate beneficiaries.

This can provide shareholders with the peace of mind that the business will be able to continue running as smoothly as possible if a senior partner or director should die or fall ill. It can also be comforting in that, in the event of death, the surviving relatives of the shareholder can receive appropriate financial compensation from the value of the deceased partner’s shares.

But given how essential this form of insurance may be to a business, there are certain times when it should be reviewed to ensure a business is still covered to the necessary degree. If you’re a business partner or owner with shareholder protection insurance, or you’re looking to take out shareholder protection insurance, here are some instances when you should review your cover.

When to review your shareholder protection insurance

If there’s a significant change in the health or lifestyle of the covered shareholder

Before you first take out shareholder protection insurance, your chosen provider will ask you questions regarding the health and lifestyle of the individual (or individuals) being covered. This includes questions like whether they’re suffering from any ailments, whether or not they smoke or drink, whether they work in a dangerous profession, whether they have any hobbies which could be considered life-threatening etc. This is to determine the level of risk involved for the insurance company to cover the person in question.

The higher the perceived risk, the more the company is likely to charge for a premium. But answering these questions openly and honestly is the only way to guarantee you’ll be covered to the degree you need. Otherwise, if you were to deceive the insurance company and needed to claim later, they are within their rights to refuse you (for example, if you lied about competing in a dangerous sport and get seriously injured).

This is also why, if you take out shareholder protection insurance, you’ll need to review your insurance and inform your insurer of any changes to your health and lifestyle they may deem important. Examples include such issues as developing a serious illness, like cancer. It may sound like a risk to disclose this information to your provider, but in doing so, you’re mitigating the risk of being rejected for a claim in the future by keeping them well-informed of your situation, so they can make changes to your policy accordingly (if necessary).

When there are fluctuations in shareholder value

The financial relief shareholders will receive will depend on the value of the shares belonging to the insured person, should they fall ill or die. When taking out shareholder protection insurance, the insurer will need access to any financial information relevant to the business, so they can provide an accurate level of coverage.

However, should your business experience a boom in profits and the value of the business increases dramatically, you need to review your cover and make sure the level of cover you’ve taken out still meets your needs, and that the remaining shareholders in the business will receive the support they’re entitled to should tragedy strike. The same can be said at the opposite end of the spectrum, though. If your business downsizes in value, your cover may no longer be suitable or be excessive for what you actually need.

When there are changes in the business structure

There are various ways the landscape of a business can change and these changes may result in you needing to review or alter the level of coverage you have with your shareholder protection insurance. Mergers and acquisitions can drastically shift the structure of your business, as well as the exit of shareholders and the entry of new shareholders. 

Where changes to ownership are involved, it is essential you check your coverage and make changes to your policy, so you’re able to prevent any discrepancies should something unfortunate occur. These changes in ownership may not just affect the structure of the business, they may also affect the value of the business as a whole, meaning your previous level of cover may no longer be acceptable to you.

Amendments to shareholder policies

To offer the maximum level of protection, the language and terms of shareholder protection insurance are exceptionally specific. This language is designed to meet the needs of the precise shareholder policies of your business. However, if these shareholder policies change for whatever reason – potentially due to structure changes in the business – you need to be sure the terms laid out in your shareholder protection insurance still meet the needs presented in these policies. 

If you find the two are no longer in alignment, it’s wise to reach out to your insurance provider and let them know you’d like to make changes to the policies to meet your expectations.

During your annual business review

Your annual business review is the ideal opportunity to review all important policies you have in place for your company, including shareholder protection insurance. In assessing your business’s performance over the prior twelve months, you’re able to better predict the needs of your business over the next twelve months, including whether or not you’ll need to make changes to your insurance policy. If it appears as though your business will experience even greater financial success in the near future, you’ll need to review your shareholder protection insurance to make sure the level of coverage you have matches what you need, or what you will need moving forward.

An annual business review is also a good time to look at your business’s risk profile and decide whether any changes in the business (structurally, financially, etc.) should be reported to your insurer to ensure they won’t affect your cover should you need to make a claim.

The benefits of reviewing your shareholder protection insurance

While all insurance policies should be reviewed appropriately, reviewing your shareholder protection insurance is beneficial to your shareholders and your business in numerous ways.

Upholding financial security for shareholders

With so much at stake, the knowledge that you and your shareholders are protected in the event of one of them falling seriously ill or passing away can be a great relief. This is especially true if the business is financially dependent on the value specific shareholders bring to the business. If something awful should happen, business heads and employees can rest easy knowing the company will remain intact.

Adapting to the changing needs of your business

All businesses change over time and it’s important your business keeps track of the protection it has in place across all departments and alters this protection as necessary. The same is also true for changing market conditions – if your policy is no longer viable due to conditions outside of your business that are out of your control, you may need to research ways your shareholder protection insurance can be better tailored to your needs.

Being compliant for legal purposes

Because shareholders have such an important role within a business, they’re answerable to the various rules and regulations surrounding business ownership including tax laws, shareholder agreements, and similar laws related to the movement of shares upon serious illness or death. You need to make sure the terms in your shareholder protection insurance are compliant with these laws and that you as a business are following the rules as you should be.

Choose shareholder protection insurance that works for you and your business

By working with an experienced and reputable insurance company for your shareholder protection insurance, you’re giving yourself and your business the best defence and best chance of maintaining stability and continual success should something awful happen to a shareholder. 

By Manali