Should Your Succession Planning Include Life Insurance on Shareholders?

The main purpose of the insurance in succession planning is in the case of a catastrophe that would take out a major shareholder and in some cases the founder.

This type of event is rare but very difficult for any company to absorb, due to the contribution, the value and number of shares majority shareholders generally hold.

The insurance needs to be sufficient enough to pay out the majority shareholders estate at the full calculated share price.

There is no discount for the retained earnings since they will be required to continue to run the company in the major shareholders absence by the other shareholders.

Term insurance or key man insurance is appropriate in succession planning and the premiums should be reasonable and paid by the company.

The Board will find that even though the number of shares may be diminishing over time as majority shareholders sell down their shares, the overall value of shares will remain high.

This is caused by the increase in value of the overall company as more owners focused on increasing the profit.

It is important that the company is protected as well as majority owners’ estates.

Insurance is not as necessary when the number and value of shares is such that the Board of Directors is able to handle the sale of those shares as though they had become available under normal circumstances and there is a sufficient market for these shares.

Internal Transfer of Ownership