Shareholders’ life insurance policies: beware of the legal traps! - Kuits Solicitors Manchester
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Shareholders’ life insurance policies: beware of the legal traps!

Shareholders’ life insurance policies: beware of the legal traps!

27th May 2021 - Published by Kuits Corporate team

As well as the emotional upset caused by the death of a shareholder, the death can also cause major difficulties within the business. Shareholders’ life insurance policies aim to ease these difficulties and ensure 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 keyman insurance and cross options.

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 for 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 request the continuing shareholders to buy the shares, and conversely the continuing shareholders can request the estate to sell the shares at the prescribed price.

The potential legal traps

If you do not have the complete arrangements in place, there are numerous pitfalls that you could fall foul of:

  • No agreement: If there are no arrangements in place, the beneficiary entitled to the shares on the death of the deceased shareholder would step into the shoes of the deceased shareholder. This may not help the business going forward if the continuing shareholders and the beneficiary have conflicting views on how the business is to be conducted.
  • No cross option: There may be a situation where the policies are put in place, but there are no cross options agreements. This means that the continuing shareholders will receive the proceeds, but are not compelled to buy the shares from the deceased shareholder’s estate. Potentially the continuing shareholders could profit from this scenario by either not agreeing to buy the shares, or trying to agree a lower price for the shares with the deceased shareholder’s estate. Likewise, the deceased shareholder’s estate would not be compelled to sell the shares, so the continuing shareholders could end up with a shareholder that has conflicting views on running the business.
  • Conflicts: Issues can arise between the shareholders and the deceased shareholder’s estate if the provisions dealing with share valuations are omitted, or there are differences between the expected share valuation and the actual value of the insurance proceeds received.
  • Inadequate wording of declaration: The declaration of trust enables the proceeds from the deceased shareholder’s life policy to be transferred to the continuing shareholders, and if the wording on this is not adequate, then the declaration becomes invalid.
  • Inadequate wording of cross option agreement: If the wording of the cross option agreement is inadvertently termed in such a way, you may be liable to lose the business property relief available on shares in relation to inheritance tax.
  • Buyback of shares: In the case of a company buyback of shares using the proceeds from the keyman insurance, not having the appropriate option agreement in place, not following the correct procedures in relation to a buyback of shares or despite receiving the insurance proceeds, the company may not have sufficient distributable reserves to buyback the shares, which is a legal requirement.

Get in touch with a Corporate lawyer today

Given the above points, we would recommended any life insurance arrangements are reviewed to make sure the process of acquiring shares from a deceased shareholder’s estate runs as smoothly as possible to avoid any further upset and obstacles in what will be an emotionally stressful time for all concerned.

For further information please contact Senior Associate Sandra Crichton on 0161 838 8177 or email

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