The sudden death or serious illness of a shareholder or senior member of a business can potentially cause financial and administration challenges for any company.

Despite the consequences of these tragic events, many businesses aren’t prepared for them.

Speaking about research into business insurance in the UK Eric Galbraith, Chief Executive of the British Insurance Brokers’ Association said:

“Too many businesses are putting themselves and their employees’ futures at risk by failing to put in place proper continuity plans should the unexpected happen… Every business needs to be properly prepared for a worst-case scenario.”

That’s why business owners should ensure they have the appropriate protective measures in place from the get-go.

But with so many different types and levels of business insurance out there, it can be difficult to know where to begin.

If you’re a business owner researching insurance products that may help in these situations, you may stumble across three different products:

  • Shareholder protection
  • Partnership protection
  • Relevant life insurance

Let’s take a closer look at all three, what they cover, and which could work for your business.

What is shareholder protection?

If a shareholder in your business falls seriously ill or passes away, your entire enterprise could be at risk.

But shareholder protection could be a lifeline. It offers the remaining owners of the business the chance to buy back the shares of the owner who is critically ill or has passed away.

The policy pays out a lump sum equal to the value of the ill or deceased party’s shares, which the remaining shareholders can use to buy the shares and keep control of the business.

Shares of the business usually pass to this owner’s beneficiaries, rather than another controlling member of the business, unless there’s a prior agreement in place. This could create a very unstable situation, potentially putting the future of the business in jeopardy.

Getting started with shareholder protection

The level of cover your business need depends on the value of the shares you’ll be buying back.

The charges are paid per individual shareholder, by the shareholder, or the policy can be in the name of the business.

The cost of shareholder protection is dependent on factors like age, lifestyle, medical history and pre-existing medical conditions. This information is used to determine whether someone is at low or high risk of losing their position in the event of the above. 

You should speak to an independent financial advisor before taking out shareholder protection to ensure you’re buying the right product for your business and any future circumstances.

What is partnership protection?

Partnership protection works similarly to shareholder protection. 

But rather than buying back shares in the event of a business partner falling seriously ill or dying, partnership protection gives the remaining partners in the business the opportunity to buy back the partnership directly from the partner in question or their estate.

The goal of partnership protection, much like shareholder protection, is to retain control of the business within a select group (normally the business owners, directors or partners) and to keep the business running smoothly with as little disruption as possible.

Getting started with partnership protection

Each partner must take out and pay for their own individual policy to protect them in the event of serious illness or death. Then, they must write that policy into a trust that will benefit the remaining partners.

If this is something you’re interested in exploring, you should always check with independent financial and legal advisers before doing this if you’re unsure.

What is relevant life insurance?

Relevant life insurance is an insurance policy set up by a business on behalf of an employee, or employees, which will pay out if the employee passes away during their term with the company.

It works almost identically to a standard life insurance policy. The employee’s personal beneficiaries (usually family) will be the ones who benefit financially upon the death of the employee. It’s a way for businesses to help their employees’ beneficiaries and offer them some comfort during what will be a very difficult time. 

A relevant life insurance policy is an appealing product for a business to offer its employees and could be seen as an incentive for them to remain loyal to a company for a long time.

Getting started with relevant life insurance

Relevant life insurance policies are calculated based on the employee’s salary and often pay out a multiple of that salary. For example, a policy that offers 10 times a £50,000 salary will pay out £500,000. 

How much the employee-in-question makes will give you a good indication of the level of cover you’ll need for them.

If you want to take out relevant life insurance for your employees, you’ll need to figure out what your business can afford. You should check your business finances, or employ the services of an independent financial advisor if you need a hand making a decision.

Do you need to take out a new insurance policy?

If you don’t have the right level of insurance in place, you could be setting yourself up for even more stress, pain and heartache should tragedy strike.

If you’re a business owner and you feel one (or several) of the above insurance policies would be a smart move for your business, now is the time to act.

Speak to a reputable insurance broker or advisor who can help guide you through the process of choosing the correct product and give yourself the peace of mind you need to move forward with your business, knowing you have the appropriate protection in place.