What is Directors Share Protection Insurance?

Directors Share Protection Insurance is a way of mitigating or reducing the financial effects of an adverse or terminal life event relating to those directors who are shareholders of a business.

Adverse life events covered by directors share protection insurance are contracts to provide financial protection from accident and sickness, or illness and disability, or even Critical Illness.  

Death is a terminal life event covered by directors share protection insurance are contracts to provide financial protection from the death of a shareholder director.

Depending on the type of directors share protection insurance policy taken out by you or on your behalf, a payment will be made either as a lump sum to the beneficiaries of the policy in the event of a claim being made.

 

How does Directors Share Protection Insurance work?

The purpose of Directors Share Protection insurance is to provide funds to the surviving shareholding directors to enable them to purchase the deceased shareholding director’s shares from the deceased’s estate. Critical illness cover can be included in the event of a shareholding director’s disability.

With regard to the death of a partner, there are three parts to this process:-

  • A Cross option agreement enables the surviving partners to have an option to buy the deceased partner’s share of the business from the deceased partner’s estate. A corresponding option allows the deceased partner’s estate to request the surviving partner/partner’s to buy the deceased partner’s share of the business from the estate.
  • A life insurance policy (term assurance upto retirement age) is taken out by each of the shareholding director’s lives for the benefit of the other shareholding director on the death of a shareholding director. This pays out the lump sum to enable the deceased director’s share to be bought from the estate.
  • Each life policy is then assigned to a Director’s Share Protection Trust (usually flexible power of appointment trust) to allow each shareholding director to make the other shareholding directors beneficiaries to their policy in the event of a claim.    

With regard to the Critical Illness of a shareholding director, a similar process applies except that a Single Option is usually used. This option allows the disabled shareholding director to request the other shareholding directors from buying the disabled director’s share, but does not provide an option for the other shareholding directors requesting the disabled shareholding director to allow them to buy the disabled director’s share.

 

Why should I take out Directors Share Protection Insurance?

The key purpose of directors share protection insurance is to provide financial protection so that the business can continue with the least disruption in the event of a claim.

There are a number of factors about an organisation’s specific circumstances that will determine which of the types of directors share protection insurance that may be applicable based on their suitability and affordability.

 

How should I take out Directors Share Protection Insurance?

The first and most important step after you have decided you may have a need for directors share protection insurance cover is to have a discussion with us to provide you with independent financial advice.

Once we have agreed what the most suitable type of business protection insurance cover is for your particular circumstances we make an application on your behalf to take out a protection policy based on how much you can afford and the amount of cover required, for a length of time to match your needs.

 

Want to know more?

Talk to one of our qualified financial advisers on 01553 777600 or e-mail us at enquiries@ringassociates.co.uk