Home / Death of a Shareholder – Shareholders’ Life Insurance Policies: Beware of the Legal Traps!
26th January 2024
Corporate Partner, Helen Mather discusses Shareholders’ life insurance policies.
A business can be adversely impacted by the loss of a shareholder and therefore shareholders of companies may consider taking out life insurance policies to protect the continuity of the business.
Types of shareholder life insurances and how it should work
There are two types of arrangements, life policies linked to cross options and keyman insurance.
Keyman insurance is taken out by the company in respect of a shareholder who is a key executive to ensure minimum business disruption in the event of the death of that key executive. Insurance proceeds are normally applied to find a replacement but can be used by the company to buy back the shares from the deceased shareholder’s estate, although this is more unusual due to the legal requirements relating to a buyback of shares by a company.
In terms of life policies linked to cross options, the policy is taken out by a shareholder and held on trust for the other shareholders, so that on the death of that shareholder, the continuing shareholders receive the insurance proceeds in order to buy the shares from the deceased shareholder’s estate. A cross option agreement would be put in place so that the estate of the deceased shareholder can require the continuing shareholders to buy the shares, and conversely the continuing shareholders can require the estate to sell the shares at the prescribed price.
The legal traps for the unwary
There are numerous pitfalls to be aware of when it comes to such arrangements including:
How Kuits can help
Given the above, we would recommended any life insurance arrangements are reviewed to make sure the desired arrangements will be implemented as smoothly as possible and to avoid any further upset and obstacles in what will be an emotionally stressful time for all concerned.