There may be very good reasons why an insurance culture isn’t as well embedded in Viet Nam as elsewhere, but shareholder protection policies really should be on top of your to-do list. Here, “Outside Looking In” explains why these are vital safety nets for business people and their investors.
The close-knit family units that are the foundation of Vietnamese culture seem to have created an aversion to insurance. But while knowing the family will always be your safety net in life is a wonderful thing, in the business world it really pays to invest in more formal protection. After all, your business represents not only the livelihood of you and your family, but also that of your employees and fellow stakeholders.
One of the most damaging events a business can fall victim to is the death of a major stakeholder. Should a business-owner die unexpectedly, the event can have a serious impact on their enterprise, not to mention the shareholder’s family. When it comes to distributing shares, family members and other beneficiaries may prefer to cash them in. Meanwhile, other shareholders may wish to purchase the shares, but do not have adequate funds at their disposal. This is where shareholder protection insurance is extremely useful.
When properly understood, shareholder protection insurance really is a “no-brainer”. Yet not everyone has a thorough understanding of what it is, how it works and what the benefits are, so here is a quick guide:
What is shareholder protection insurance?
Put simply, shareholder protection insurance is designed to ensure that the aftermath of a shareholder’s death is as stress-free as possible. It involves writing up a series of legal agreements that set out how shares are to be managed if a stakeholder passes away. Either the fellow shareholders or the company as a whole takes out insurance policies on the lives of each shareholder. Should a shareholder then die, policy pay-outs can be used to purchase the shares of the deceased holder.
The three big benefits of shareholder protection insurance
1. A safe and stable business plan
In today’s cut throat world of business, it’s crucial to underpin an enterprise with a safe and stable business plan.
Deceased shareholders are a guaranteed way to shake up operations and seriously jeopardise the strength and unity of a business. By taking out shareholder protection insurance, shareholders enjoy the total peace of mind that should a fellow investor pass away, surviving shareholders will not have to worry about finding the money to purchase assets. Instead, they will receive pay-out funds that allow them to buy up the deceased’s shares quickly and efficiently. This means the business can return to normal as quickly as possible.
2. Support for family members
Although shareholders generally have an in-depth understanding of how to leverage their assets, inheriting family members often have no idea how to manage a portfolio. Most would, therefore, rather receive money, as this is far more useful to them.
Cash payments can also help to relieve the stress that families face when they lose a main provider. When taking out shareholder protection insurance, company stakeholders can rest easy that their families will receive financial compensation in the case of their deaths. The policies guarantee a fair buy-out price, as well as a quick, easy and stress-free process.
3. Illness and disability protection
As well as supporting fellow shareholders and family members in the case of death, shareholder protection insurance can also be used to cover serious illnesses. Given that the right agreements and policies have been put in place, a sick shareholder is able to sell shares to continuing shareholders. Should a shareholder fall ill, the knowledge that they have shareholder protection insurance will be a big weight off their minds.
The three main types of shareholder protection insurance
In the UK, shareholder protection insurance agreements can be written in three different forms. The types of policies that shareholders and companies need to take out will depend on the nature of their operations, as well as their individual preferences, so please seek proper advice to assure the purchase of the correct policy that meets your needs.
1. “Life of another” policy
This method is generally adopted when a business is run by just two shareholders, and sees both parties apply for a policy on the life of their fellow shareholder, which should represent the value of their current shares in the business.
Should a shareholder die, insurance is paid to the surviving policy-holder, who can then use the funds to purchase shares from the deceased shareholder’s family or estate. The surviving shareholder will then be the sole owner of the business. When there is a large age gap between the two directors’ policies, prices can vary significantly. You should also know that in the UK, each shareholder tends to pay the premium out of their own pocket to avoid tax and National Insurance liabilities.
2. Company share purchase
Under this method of shareholder protection insurance, the company itself, as opposed to the surviving shareholders, purchases shares back from a deceased shareholder.
Under this method, as soon as a company is established it takes out policies on all its shareholders, with the value of the policies matching the value of each investor’s shares. Since the company pays for the premiums, it receives any funds in the event of a shareholder death. Due to company law and tax procedures, it is generally quite a complex and lengthy process, so it is usually advisable to engage corporate lawyers and tax advisers to ensure that policies are watertight and compliant.
3. “Own life” policy held under business trust
This method sees each individual shareholder take out their own policy, which is held under a business trust. This should equal the value of their shares and can be drawn up to apply for a fixed term, or up until retirement. Should a shareholder die, other shareholders can then use policy pay-out funds to purchase their shares, allowing them to be divided equally among surviving shareholders.
To conclude:
The preceding is only a very brief introduction, but it should have impressed upon all business owners and investors that purchasing shareholder protection insurance could be one of the wisest moves they ever make.
From small-scale enterprises to multi-national corporations, shareholder protection insurance is a must-have policy for any savvy company. As well as ensuring the stability and longevity of the business, policies also offer the peace of mind that fellow stakeholders and family members will be looked after if the worst happens.
As the old saying goes, “Nothing is certain except death and taxes” and to simply ignore the risks won’t make them go away.
* Brian Spence is Managing Partner of S&P Investments. He has over 35 years of experience in the UK financial services industry as an investment manager, financial planner, and M&A specialist. He is a regular contributor in the UK financial press and has a deep understanding of the financial services community. Brian’s column will reflect on all the challenges and opportunities within the Vietnamese market, bringing a fresh perspective to today’s hottest issues. Feedbacks should be sent to the columnist’s email at brian@sandpinvestments.com.