Shareholder Protection Insurance
Shareholder Protection Insurance provides seamless ownership transition by providing the necessary capital for remaining shareholders to acquire the affected partner’s equity stake, maintaining business continuity while protecting both the company’s and stakeholders’ interests.
- Pays out in the event of a shareholder’s disability or death
- Help build succession planning into your business plan
- Ensures the beneficiary’s estate is protected
What is Shareholder Protection Insurance?
Shareholder protection insurance, often referred to as a buy/sell agreement, is a policy that allows business owners to buy back shares from a partner in the event of critical illness, terminal illness, or death.
This type of policy ensures that surviving shareholders can retain control of the business, avoiding disruption or outside interference. At the same time, the deceased or ill shareholder’s family receives a cash payout — giving them fair value for the shares without needing to be involved in running the company.
In other words, the business stays with the business partners, while the family receives financial certainty. It’s a win-win that protects business continuity and personal financial well-being.
But without a plan in place, the opposite can happen.
A shareholder’s unexpected death or serious illness can leave your business in limbo. Their shares might pass to a family member with no interest or expertise in the business — or worse, someone who wants a say in how it’s run.
Without the cash to buy them out, surviving owners can lose control of the company they helped build. Legal disputes, stalled decision-making, and financial pressure can follow at the worst possible time.
What if something happens to a Shareholder?
Most business owners don’t consider how sudden events could affect their company’s ownership structure until it’s too late.
What if a business partner is diagnosed with a critical illness? Or worse, passes away unexpectedly?
Who ends up owning their shares — their spouse, their children, or the remaining shareholders?
Would your business have the funds to buy out its stake… or be forced to take on debt or bring in an outside investor?
Without a clear agreement and the funds to back it up, even the strongest businesses can face uncertainty, legal disputes, and financial strain.
How much does shareholder protection insurance cost?
The cost of shareholder protection insurance depends on several key factors related to each insured shareholder:
- Age and health: The older or less healthy a shareholder is, the higher the premium is likely to be — as the insurer takes on more risk.
- Value of their business stake: Higher cover amounts (to match a larger shareholding) result in higher premiums.
- Type of cover selected: Policies that include life cover only are generally less expensive. If you add trauma (critical illness) or total permanent disability (TPD) cover, the premium will increase due to broader protection.
In short, the more comprehensive the protection and the greater the risk profile, the higher the cost of the policy. But that cost reflects the value of ensuring a smooth ownership transition and protecting both the business and the shareholder’s family.
For example:
If you’re two business partners around 40 years old, you’re probably looking at about $60 to $120 each per month for $500,000 of life and trauma cover. It’s a relatively small cost when you think about how much protection it gives for something as important as your business.
👉 Want a tailored quote based on your shareholder structure? Book a quick call and I’ll walk you through it — no pressure.
Case Study: How Shareholder Protection Insurance saved a business from uncertainty
Mark held a 25% share in a marketing agency valued at $1.5 million. The other three shareholders each owned 25% as well.
When Mark passed away unexpectedly, his 25% ownership transferred to his 19-year-old daughter. Unfortunately, there was no shareholder agreement or insurance in place to guide the transfer of shares.
She disagreed with the valuation offered by the remaining shareholders, triggering months of legal and financial dispute. The situation led to increased business costs, project delays, and strained relationships — as lawyers and accountants were brought in to mediate the disagreement.
In hindsight, a shareholder protection policy, supported by a buy/sell agreement, could have provided a pre-agreed valuation and immediate funding, allowing the remaining shareholders to purchase Mark’s shares smoothly. At the same time, Mark’s daughter would have received a fair and timely payout, without the burden of navigating business ownership.
With the business back on track and the dispute resolved, the remaining shareholders decided to work with LifeCovered to arrange proper business insurance.
LifeCovered helped them set up shareholder protection insurance and advised them to work with their lawyer to create a buy/sell agreement. This ensures shares can transfer smoothly if one of the shareholders dies or becomes critically ill.
Since two of the shareholders are directly responsible for over 30% of the company’s revenue, LifeCovered also recommended key person insurance. This cover would provide a cash payout if either key person became disabled, terminally ill, or died—helping the business cover the cost of finding and training a replacement.
How does Shareholder Protection Insurance work?
Shareholder protection insurance is a legal and financial agreement between all the shareholders in a business. It sets out exactly what happens if one of the shareholders can no longer continue due to death, serious illness, or injury.
Each shareholder is insured, and if one passes away or becomes seriously ill, the policy pays out a lump sum. This payout gives the remaining shareholders the funds needed to purchase the departing shareholder’s business stake at a pre-agreed price — ensuring business continuity and control.
Put simply, the insurance payout means the remaining business owners can buy the shares, and the one leaving — or their family — gets the agreed amount in cash, without having to deal with owning or running the business.
What are the benefits of Shareholders Protection Insurance?
- Shareholder protection can be paramount for small businesses since many smaller firms might struggle to raise buy-out capital at short notice.
- Businesses don’t need to save up capital or dip into their savings for funds to purchase an outgoing shareholder’s stake in the firm.
- If a shareholder dies without a policy in place, their stake in the business could be inherited by an unwelcome beneficiary or sold to a rival.
- The insured person’s beneficiaries have clarity over the amount they will receive for the company shares when the other shareholders buy them out.
Book Your Free Business Insurance Review
Want to protect the business you’ve built? Book a quick call and let’s put the right structure in place
FAQs
Is shareholder protection insurance worth it?
Yes, shareholder protection insurance is worth it because it is the most efficient means of providing buy/sell funding or new capital upon a shareholder’s death, illness, or disability.
How much cover do I need for my shareholder protection insurance?
The short answer is you and your business partners need enough capital to buy the existing shareholder’s shares. And as businesses grow, their value can naturally go up. This is why reviewing shareholder protection insurance every year is important to ensure it’s still useful.