Shareholder protection insurance

Picture a company owned by three people in roughly equal shares. Its value sits mostly in what the three of them do rather than in plant or property. One dies on a Sunday afternoon. By Monday the estate owns a third of the company, and under the will that stake usually ends up with a spouse or a family trust — an asset with no market: no buyer for a third of a private company, no employment in the business, and dividends decided by the two people still running it.

Meanwhile the survivors have gained a shareholder who never chose the business. Reasonable disagreements start immediately: the survivors want to reinvest, the spouse wants income; the survivors want to hire, the spouse wants the company sold while it still has value. Nobody is behaving badly. The structure is simply wrong for everybody in it.

Shareholder protection is the money that resolves that. The sum insured is set to the value of each stake, and on a death the proceeds buy the shares from the estate. The family converts an unsellable holding into cash, the survivors keep control, and the price was agreed while everyone was alive and rational.

The same logic applies when a shareholder will never work again. That case is arguably worse: they are still alive, still on the register, and often still drawing something from a business they can no longer contribute to. Many agreements deal only with death. If yours does, close the gap.

Personal ownership, with a cross-purchase agreement

Each shareholder holds a policy — on their own life, with the agreement directing where the proceeds go, or on the lives of the other shareholders, which is the true cross-purchase form. Money reaches the survivors or the estate directly, and the agreement compels the transfer of shares in exchange. The attraction is that it never touches the company, so company creditors cannot catch it. The drawback is administrative: cross-purchase between four shareholders needs a lot of policies, and every change in shareholding means re-papering.

Company ownership

The company owns a policy on each shareholder’s life, pays the premiums and uses the proceeds to buy back and cancel the deceased’s shares. Administratively this is the tidy option and it scales cleanly. But a share buy-back is a Companies Act 1993 transaction: the board must satisfy the solvency test, the constitution must permit it, and the process must be documented. There is also a question about whether money moving from the company to a shareholder is treated as a dividend.

These are the details that decide whether the cover does what you expected. Read them before you compare on price.

• Whether a buy-sell agreement exists, is signed, and matches the insurance. Cover without an agreement funds nothing in particular.
• Whether the sum insured still reflects what the shares are worth. Businesses grow; old policies have not.
• Whether TPD is covered, and on what definition. Any-occupation TPD is a hard test for an owner who can still do something.
• Whether trauma cover belongs in the arrangement. A shareholder recovering from serious illness may want out without being permanently disabled.
• Whether the agreement handles a shareholder who simply wants to leave — far more common than death.
• Whether the premiums are paid by the right party. Who pays affects the tax analysis, and it is expensive to undo.

Every New Zealand insurer writes shareholder protection cover to its own wording, and the words are where the money is. Two policies that look identical on price can pay very differently when it matters. Closing that gap is the entire job of an adviser.

• Where one insurer is unhappy with a shareholder’s health history, an adviser can place that life elsewhere rather than loading the whole arrangement.
• Insurers financially underwrite large business sums insured. An adviser knows what each one expects before the application goes in.
• TPD definitions and maximum business sums insured vary more between insurers than they do for personal cover.
• An adviser can coordinate with your lawyer and accountant so the policy ownership matches the agreement.

There are three ways to buy life cover in New Zealand, and they are not equivalent. You can buy direct from one insurer, which means you see one product range and one underwriting appetite. You can buy through your bank, which usually means a single insurer’s product sold under the bank’s brand, often with narrower definitions. Or you can go through an adviser, who quotes several insurers at once and is required to put your interests first.

The premium you pay is the same either way. Insurers build adviser commission into their pricing whether or not an adviser is involved, so going direct does not get you a discount — it just removes the person whose job is to argue your corner at application and at claim time.

• An adviser can see which insurer is currently taking your health history on standard terms, and which one will load or exclude it.
• An adviser can structure cover across two insurers if that produces a better outcome than putting everything with one.
• An adviser handles the underwriting back-and-forth, and is the person who chases the claim when a family is least able to.
• An adviser has to document why the recommendation suits you, which is a written record you can hold them to.

We are a referral service, not an insurer. We do not quote premiums and we do not sell policies. What we do is put you in front of one licensed New Zealand adviser who can compare the market properly.

1. 1

   You tell us what you are looking at

   The form takes about a minute. Nobody asks for your medical history on a web form — that conversation happens with the adviser, properly, and only once you have decided to proceed.

2. 2

   An adviser calls you

   A licensed New Zealand adviser talks through your situation: who depends on you, what you owe, what you already have in place, and what you are actually worried about.

3. 3

   They compare the market

   The adviser quotes across the major insurers, checks which of them will take your health history on the best terms, and puts the options side by side in writing.

4. 4

   You decide, in your own time

   There is no obligation and no cost to you. If the answer is that you already have enough cover, a good adviser will tell you that.