If you’re a business owner in New Zealand, chances are you’ve thought about growing revenue, managing costs, or hiring staff. But here’s a tougher question: what would happen to your business if one of the shareholders became permanently disabled or died?
It’s not a topic many of us enjoy thinking about, but it’s one of the most important parts of long-term planning. This is where shareholder protection insurance steps in.
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What Is Shareholder Protection Insurance?
Shareholder protection insurance is designed to provide cover if a business owner dies, becomes permanently disabled, or suffers a serious illness. The policy pays out a cash lump sum that allows the remaining shareholders to buy the departing owner’s share of the business.
Think of it as a safeguard for your company’s future. Instead of your co-owner’s shares going to their estate or family (who may not want to be involved in the business), the surviving shareholders can use the payout to buy the shares and keep control of the business.
Why Should Shareholders Consider This Cover?
Without an agreement in place, the death of a shareholder can leave businesses in limbo. The shares may:
- Pass to a family member who has no experience running the business
- Need to be sold externally, meaning you could suddenly be in business with a stranger
- Cause disputes about valuation, ownership, and management
With a shareholder protection policy, you avoid those risks. The cover provides funds for the remaining shareholders to purchase the value of the shares at a pre-agreed level, ensuring smooth transition of ownership.
How Does It Work in Practice?
Here’s the simple version:
- Each shareholder is insured for the value of their shares.
- If something happens, such as death, permanent disability, or terminal illness, the insurance provides a lump sum payout.
- The surviving shareholders use those funds to buy out the shares of the affected shareholder.
- A formal shareholder agreement, usually set up with lawyers and accountants, makes the transfer legally binding.
It’s essentially a business continuity plan in action.
Shareholder Protection vs Key Person Insurance
As a shareholder protection insurance broker, a lot of NZ business owners ask me: “Isn’t this the same as key person cover?”
Not quite.
- Key Person Insurance protects the company’s revenue if a critical staff member or director dies or becomes disabled. It provides a payout to cover lost profit or to recruit and train a replacement.
- Shareholder Protection Insurance is specifically about business ownership. It ensures the right people keep control of the company after a shareholder dies or becomes permanently disabled.
Most well-run companies will have both types of business insurance in place.
Who Needs Shareholder Protection?
This type of cover is relevant if:
- You’re in a partnership, a limited liability partnership, or a private limited company
- You’ve built a business with a spouse or business partner and want clarity about future ownership
- You have more than one shareholder and want to protect against disputes or forced sales
It’s less relevant for sole traders, because there are no shares to transfer. In that case, key person or income protection cover may be more appropriate.
What Shareholder Protection Provides
To put it simply, shareholder protection provides financial security and peace of mind. It ensures:
- Control of the business stays with the people who run it
- The family of the deceased shareholder receives fair value for their shares
- Surviving shareholders don’t have to borrow large amounts of money to fund a buyout
- The business can continue without ownership uncertainty hanging over it
Cost of Shareholder Protection Insurance
The cost of shareholder protection insurance in NZ depends on:
- The age and health of each shareholder
- The value of their shares in the business
- Whether you include permanent disability or serious illness cover
In most cases, it’s not much more expensive than a personal life insurance policy, adjusted for the higher sums assured tied to the value of the business.
Why It’s Worth Considering Now
The reality is that unexpected illness, injury, or death can happen to anyone. If a shareholder became seriously ill tomorrow, could the other shareholders afford to ‘buy out’ their share of the business?
Shareholder protection insurance provides the cash to make that possible, without draining company reserves or putting personal finances at risk.
It’s about ensuring business continuity, protecting your legacy, and giving peace of mind to both your co-owners and your family.
Final Thoughts – Protect Your Business Ownership
As an independent insurance broker here in New Zealand, I’ve seen too many situations where businesses were left scrambling after the death of a shareholder. Having shareholder protection insurance in place, alongside a solid shareholder agreement, makes all the difference.
If you’d like to explore whether this type of business insurance is right for your company, I’d be happy to talk it through.
Get in touch today for a no-obligation discussion about shareholder protection insurance and how it could protect your business.
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