Shareholder protection with each owner's own life in trust means every owner takes a policy on themselves and writes it in trust for the other owners; the alternative, life of another, has the owners insure one another directly. Because each owner has to insure every other owner, life of another multiplies quickly (four owners would need twelve policies), so the number of owners often settles the choice, and an option agreement between the owners is what gives the survivors the right to buy.

Co-owners choosing between these layouts can put the question to an FCA-authorised broker, with a free phone call set up by the form on this page.

Which set-up suits two owners, and which suits more?

The two routes differ in who holds the policy and who receives the money.

Own life in trustLife of another
Whose life is insuredEach owner's ownThe other owners'
Who is paidThe trustees, who pass the money on to the other ownersThe surviving owners directly
TrustYes, in place on or before the day the policy startsNot part of the layout; the owner of the cover is its beneficiary unless they assign it or place it in trust
Policies for four ownersFour, one eachTwelve, each owner insuring the other three
Number of ownersDescribed for companies, partnerships and LLPsBest kept to a few owners, given the count above

The table draws on Aviva's cover details for Business Protection Term Assurance and Scottish Widows' adviser page on its Business Trust. What shareholder protection is for, and the cover types, are in what shareholder protection insurance is.

How does shareholder protection with own life in trust work?

Scottish Widows says its Business Trust is valid only if signed and dated no later than the policy's start date, and expects every partner or fellow shareholder to take part. Aviva's guide to its Business Trust needs at least two trustees: the person insured and at least one other. The insured owner will usually pick fellow owners as trustees and beneficiaries.

On a claim the insurer pays the trustees, who distribute the money to the beneficiaries. That avoids waiting for probate. Aviva points out that a policy outside a trust pays its death benefit to the estate, so the insurer needs probate or letters of administration first, a step that "can take several months". Scottish Widows says that where at least two additional trustees are in place, the proceeds go to them without probate. How trusts work in general is in what a life insurance trust is.

If an owner leaves, Legal & General's guide says the arrangement will normally stop applying to them and the policy reverts to them; if they keep their shares, the policy and the arrangement continue. For owners who want to be sure a trust is right at all, does life insurance need to be in trust sets out the general position.

How does life of another work, and where does it run out?

Under life of another each owner takes plans on the others' lives. Aviva's cover details say that someone who takes cover on another person's life becomes its owner and is the beneficiary on a claim unless they assign the cover or place it in trust; where a business applies, the business is the owner. The owner may choose whether they or the person covered pays the premiums.

Aviva also requires the owner to have an insurable interest in the person covered when the cover starts. Beyond your own life and a spouse's or civil partner's, Aviva says you may hold one in someone else if you would reasonably expect to lose money should they die or fall ill, and it may ask for proof when the owner and the person covered are different people. Whether co-owners have one in each other, and what becomes of a policy on an owner who later leaves the business, are points a broker can walk through for your own business on the call-back.

The limit is the count of policies: every owner needs one on each of the others, so three owners need six and four owners need twelve. Where there are three or more of you, the broker who phones you back after the form can explain how each layout would be put to insurers.

What are the drawbacks of each route?

Own life in trust

Legal & General's guide has each owner pay the premiums on their own life, and says these may not be the same because of different ages and amounts of cover; evening out that difference is explained on shareholder protection premium equalisation. There are two tax points. Legal & General says an income tax liability, known as pre-owned asset tax, may arise because the trust fund could revert to an owner who resigns, retires or otherwise stops being an owner, though as the policy's value is likely to be negligible, so is the effect of the tax. Aviva's trusts guide says that if the money is kept in the trust long term some inheritance tax may be payable, and a charge could arise when money leaves the trust.

Legal & General adds that in most cases, where a life policy with no surrender value is the only asset in trust and the person insured is in good health, its value for inheritance tax is likely to be negligible. That is the general position, not tax advice; is shareholder protection tax deductible covers the premiums.

Life of another

The drawbacks are the multiplying policies, the insurable interest test and the question of what happens to a policy on a co-owner who later leaves, all covered above.

What does the cross-option agreement add to either set-up?

The policies supply the money; the agreement supplies the right to use it. Legal & General calls a cross-option agreement the basis for the share purchase. Legal & General's share protection page gives the surviving owners an option to buy and the estate a matching option to sell within a set period (its example is two months from the death), and once either side uses its option the other must comply. Until then, its guide adds, neither side is obliged.

Scottish Widows describes its Business Trust as suitable only where owners have entered, or are about to enter, an option agreement, and offers a draft for the owners' legal adviser. Legal & General likewise expects the owners' own lawyers to approve the agreement. How the options and the price work in detail is in the shareholder protection overview, and what the premiums come to is on shareholder protection insurance cost.

When the owners have chosen a layout, a broker can arrange quotes on each owner's life, and the call-back you request in this page's form costs nothing. The wider range of business cover is in business and workplace cover.

Frequently asked questions

Must a shareholder protection policy sit in a trust?

Under own life it does: in Legal & General's arrangement each owner writes their policy in trust for the other owners. Under life of another the policy is owned by the person who takes it out, who is the beneficiary unless they assign it or place it in trust, according to Aviva. Own-life layouts such as Scottish Widows' Business Trust require the trust to be in place from the start.

Can a business trust cope when a new shareholder joins?

It can in Aviva's design. Aviva's Business Trust is discretionary, so the beneficiaries can be changed after it is created, and Aviva says new shareholders above a certain percentage can benefit automatically without revising the share purchase arrangement. Shareholders who leave are removed from the beneficiaries.

Is a company buying the shares the same as life of another?

No. In a company share purchase the company takes the policy and the money goes to the company to buy back the shares, which is a different structure with its own rules. It is set out in the shareholder protection overview and, alongside the other business covers, in business protection insurance.

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