Shareholder protection is like any other type of business or personal insurance.
You pay for it, but you hope you’ll never need it.
It’s there as a safety net to provide funds in the event you need to purchase shares back into the company if a shareholder dies or becomes too ill to continue in the business.
Protection insurance is something you should view as a business investment, and like any investment you’ll need to know how much it will cost you.
Calculating the cost of shareholder protection
The cost of shareholder protection will always come down to the individual shareholders being covered and the business.
The individual information will be the same you’d provide for any other type of life insurance, for example general health, age and lifestyle factors.
Then there is the calculation of the share value.
Understanding the share value is important because this is how much will need to be paid out in the event a shareholder dies – which will obviously affect the cost of premiums.
The best way to calculate your exact share value is to speak with your company accountant as they can take your company type and size to come to an accurate conclusion, however to get a rough evaluation there are a few things you can do.
One is to use a multiple of earnings which involves taking the profits for a single year (or the average over multiple years if the company has been operating for some to) and then using a multiplier to determine the price the company would bring if it was sold.
You can then use the shareholder’s percentage share of that price to determine what their shares are worth.
So for example if a shareholder owned 25% of a business valued at £1,000,000, their shares would be valued at £250,000.
And that’s the amount of cover you’ll need to insure again.
It’s worth noting though that a multiple of earnings is more common in larger or more established businesses with a turnover and profit history.
For a small or new business taking out shareholder protection immediately, the value could be more difficult to work out and the coverage will likely change as the business grows but you could use projected first year cash flow and profits as a starting point.
What will impact the cost of your shareholder protection premiums?
Once you’ve calculated the level of protection you need to insure against, you’ll need to understand the factors that will impact the cost of your monthly premiums, and these will be determined by the health and lifestyle factors provided by the individual shareholders.
Typically speaking the three biggest deciding factors when insurers look at an individual are:
- Whether they’re a smoker
- Any pre-existing health conditions
Smokers (even recent ex-smokers) as well as those with pre-existing health conditions will automatically pay more on premiums as they’ll be deemed at higher risk.
Similarly, older shareholders will pay higher premiums than their younger counterparts for the same reason that they’re deemed higher risk.
As well as these factors the shareholder’s lifestyle will be taken into account, and this can be where the premium price can increase or decrease.
For example the more active and healthy the shareholder the lower the premiums, although those who participate in more ‘risky’ activities like an extreme sport for instance, could pay higher premiums.
Reviewing your ongoing protection
Like any insurance, shareholder protection isn’t a static product and the price or the amount of cover you need can change quickly and often depending on a number of factors.
From a cover perspective, most shareholders only review their protection level at the end of the policy, but this can be risky if your company has grown (which hopefully it has) in the period between taking your cover and the policy ending.
If your company has grown and you haven’t updated your policy you could find yourself underinsured.
The safest thing to do is to review and update your level of cover in line with any business changes.
Also, it’s critical to keep your personal and medical information updated with your insurer to ensure it’s accurate and up to date.
If you fail to keep this information up to date and then need to make a claim any changes in what your insurer has on record could void your insurance.
Protecting your business with shareholder protection
Considering the financial consequences of not having shareholder protection it’s important you at least consider safeguarding your business’ future against the sudden death of a shareholder.
With the funds available to bring outgoing shares back into the business quickly and avoid any further disruption shareholder protection insurance can help keep your business more stable and secure during what will be a difficult time.