There are three methods to write shareholder protection.

• Own life policy held under business trust
• life of another policy
• company share purchase

Life of another policy

This method is usually used where there are only two shareholders and it is unlikely that there will ever be more shareholders. Each shareholder applies for a policy on the life of the other shareholder equal to the value to their shareholding within the business.

Each of the directors pay the premiums themselves otherwise if the company paid the premiums, it would be seen as benefit in kind and subject to income tax and national insurance. On the death of a shareholder the proceeds are paid to the policy owner who then uses these proceeds to buy the deceased shares from their family or estate. The surviving director thus owns the company outright and the decreased shareholders estate has been dealt with quickly.

The reason why this method is only ever popular with companies with two directors is that only two policies need to be taken out. If there were three directors, 6 policies would need to be taken out, and four directors would need 12 policies. Another disadvantage to this method is where there is a significant age gap between directors. The costs of a policy for a a director in his 50’s will be higher than a director in his 20’s.

Company Share Purchase

This can be a fairly complex process due to company law and tax procedures and usually involves the help of tax advisers and corporate lawyers. Essentially the company buys back the shares from the deceased shareholder rather than the surviving shareholders buying them.

The company applies for policies on the shareholders equal to their shareholding values. The policies are usually written until retirement age. The company pays for the premiums and therefore receives the proceeds in the event of a claim.

As the company pays for the premiums corporation tax relief isn’t available because the policy isn’t set up to meet the loss of profits on death. The proceeds of the policy will be free of corporation tax as they are for capital purchase.

Own life policy held under business trust

Each shareholder has their own policy held under a trust for the value of their shares. The policy is arranged as a fixed term or up until the point of retirement.

If a shareholder dies or becomes critically ill then the other shareholders would use the funds from the trust to purchase the shares of the critically ill or deceased shareholders estate. Those shares are then split equally between the remaining shareholders.

In order to make sure that the proceeds are used to buy the shares the company must either change their Articles of Association or set out a seperate agreement.  This is usually a cross option agreement.