A shareholder agreement is an essential part of your financial portfolio, and therefore essential to disclose to your agent. Life insurance is part of your financial planning process, making all major financial agreements important to your life insurance agent. The Hometown Insurance agents can help you assess your shareholder agreement and how it affects your life insurance needs.
A shareholder’s agreement is an agreement that outlines how a company should operate and outlines the shareholder’s rights and responsibilities. Shareholder agreements should address necessary insurance protection:
- Establish current and future share ownership
- Outline transition for shareholder departure
- Define and restrict the ownership or transfer of shares
- Provide market value for share transfers
- Dispute resolution
Insurance Agent and the Shareholder Agreement
Life insurance agents can review your shareholder agreement to ensure that the deal ensures your beneficiaries will not struggle over the financial impact of the beneficiary transition of shares. Life insurance and shareholder agreements have shared goals in that each provides opportunities for the smooth transition of ownership. A life insurance agent can ensure that your shares and your vested interests are established to secure business continuity and ownership continuity with a shareholder agreement.
Beneficiary Information – Current and Future Owners
Naming beneficiaries is an important decision. A beneficiary is a person who will inherit the payment of your life insurance, death benefit, assets, or other wealth. As an owned asset, shares are assets to be inherited, but they also represent a part of a bigger enterprise. The longevity of the company represented in those shares is equally essential. Defining beneficiaries or ownership transition rules in a shareholder agreement ensures that the company is prepared to continue even if a valuable human asset dies.
Transition
Another reason to include your insurance agent in the review of your shareholder agreement is the transition language of shares. A life insurance policy funds a buy-out provision. This is a one-time payment by a life insurance policy that will immediately purchase the decedent’s shares. This process allows the shares to remain in control of the company.
A shareholder agreement might also have language for a shotgun clause or the first right of refusal. The shotgun clause allows one shareholder to offer a buy-out of another shareholder. If the proposal is unsatisfactory, the shareholder must offer to sell their shares for that same value. The first right of refusal outlines a transition plan for who would get first rights to the shares and how the shareholder will sell them.
Life insurance can ensure that sufficient funds are available if needed if the appropriate coverage is selected. If the insurance is not enough, the shareholder agreement should address this potential shortage. One solution may be the language for a buy-out provision over a period of time to reduce the burden on remaining shareholders.
Fair Market Value
When discussing a shareholder’s shares’ possible sale, those shares’ value becomes integral to the transition. Without an agreement of value, the dispute over the shares’ value can disrupt business and cause distress to the parties involved. Fair market value is one way to determine how much a department shareholder should receive. In other circumstances, such as the unexpected departure of a shareholder, discounted pricing may be more appropriate.
Dispute Resolution
Not all transitions go smoothly, despite the best-laid plans. Shareholder agreements should address the possibility of dispute and define dispute resolution methods to avoid or reduce litigation. Litigation is a costly procedure and is disruptive to business continuity. Arbitration is a dispute resolution alternative that can help minimize litigation costs and shareholders and business costs.
Planning for dispute resolution requires individual advice. A business’ unique needs should be addressed with custom language that works with shareholders for effective and fair dispute resolutions.
Life Insurance for Shareholder and Corporation
Life insurance agents can help address both the individual needs of a shareholder and a company’s business needs in the event of a shareholder’s passing. If you have assets such as shares in a company, a life insurance agent will help you plan what type of life insurance you need and how to ensure your loved ones receive any assets you seek to pass on. For more information on life insurance, visit the Financial Consumer Agency of Canada to learn what type of policy is available to you and how to name a beneficiary.
In a shareholder agreement, the involvement of life insurance may be a shared ownership agreement. In this instance, the policy’s ownership is between the corporation, which usually owns the policy, and the shareholder covered by the policy. The cost is often shared by the individuals who have a mutual interest in preserving the shares and the corporation.
The policy is designed to facilitate all the corporation’s needs regarding the shares that must be transferred upon the shareholder’s death. The complexities of the laws involved are best reviewed by people familiar with the policies, the agreements, and the expectations of all the parties involved. To learn more about corporate life insurance policies for shareholders, read this article from The Institute for Advanced Financial Education.
Final Thoughts
Shareholders and their shares have dual motives for protecting their shares and ensuring these assets’ smooth transition. The corporation and the shareholder are interested in maintaining business continuity and security, while the shareholder also has a personal interest in protecting his or her own investment. A life insurance agent can help each party with these dueling needs.
To learn more about Life Insurance and shareholder agreements, contact Hometown Insurance experts at (unable to find number or site). Our licensed professionals will be happy to answer any questions you have.
External Links:
https://iafe.ca/the-valuation-of-corporate-owned-life-insurance-on-the-death-of-a-shareholder/
https://www.canada.ca/en/financial-consumer-agency/services/insurance/life.html#toc3
