Shareholder protection premium equalisation is a way of adjusting what each business owner pays so that the cost matches what each is likely to gain from the arrangement. In the usual set-up each owner pays for the policy on their own life, and because owners differ in age and in the amount of cover each needs, those premiums are rarely the same.

The owners' ages and shareholdings can be weighed up by an FCA-authorised broker before they agree a split, and it costs nothing to request that on the form on this page.

Who normally pays the premiums on shareholder protection?

Legal & General's share protection guide (W13813 02/26) says: "Each owner undertakes to pay premiums on their own life." Each owner takes a life policy, or life with critical illness, and writes it in trust for the other owners, so the policy pays the survivors, who can then buy the deceased's shares. How that arrangement works is in our shareholder protection guide; the alternative of owners insuring each other is weighed in own life versus life of another, and other business covers in our business protection guide.

The company can pay instead, but the same guide says that if it pays for a shareholding director the premium "will be classed as remuneration" and the director becomes liable for income tax and, if applicable, National Insurance on it. Whether the business can claim anything back is covered in our page on tax deductibility, and what drives each owner's price is in the shareholder protection cost guide.

Why are the owners' premiums not the same?

Legal & General notes that each owner's premium "may not necesarily be the same because of the different ages and amounts of cover". An older owner usually pays more for the same cover, and an owner with a bigger stake needs a larger sum assured to buy them out.

That matters because the money only ever goes to the owners who survive. An older owner paying the highest premium can end up paying the most towards cover they are the least likely to collect on, which is the imbalance equalisation sets out to correct.

What does premium equalisation do?

LV= says on its adviser calculator page that premium equalisation makes sure business owners "only pay an amount that is commercially relative to the benefits they stand to gain". Once the premiums are shared, a younger owner with a smaller shareholding should pay a relatively larger proportion of the overall premiums than an older owner with a larger shareholding, because the younger owner's potential benefit is greater.

Each owner still pays for the policy on their own life; the imbalance is settled elsewhere. Legal & General suggests that, if possible, the business adjust the owners' pay or drawings to compensate for it.

How that adjustment is made, and what it means for each owner's income tax and National Insurance, depends on the company and on how its owners are paid, so it is a point to settle with the company's accountant before the policies start.

Why do insurers frame equalisation as commercial?

The word matters for inheritance tax. Legal & General's guide expects no inheritance tax on the premiums, providing all owners participate, because the arrangement "will be considered to be a bona fide commercial arrangement". LV= describes equalisation in the same commercial language: each owner paying in proportion to what they stand to gain. How premiums are treated for inheritance tax more generally is set out in the shareholder protection cost guide.

Legal & General bases its guide on its understanding of current law and HMRC practice, which can change, and it strongly recommends taking your own legal or tax advice before going ahead. Whether an uneven split would affect your own position is a question for an accountant or tax adviser.

How is the split worked out with three or more owners?

With two owners the trade-off is easy to picture; with more, each owner's share depends on everyone else's cover and premium. LV='s premium equalisation calculator, on its adviser site, takes up to ten shareholders or partners and describes itself as calculating "how to fairly split the premium costs amongst shareholders or partners in the business". For each person you enter a sum assured and an annual premium, and it returns an equalised premium and the premium difference.

LV= says the results "should only be used as a guide", so whoever arranges the cover should check the figures before the owners settle on them. Should the owners want their own numbers walked through, that is something a broker can cover on the free phone call the form arranges.

Frequently asked questions

If the shareholdings are equal, should everyone pay the same?

Not necessarily. Equal stakes usually mean equal sums assured, but Legal & General notes premiums can still differ with age, and on LV='s description the younger owner's greater potential benefit means they should carry a relatively larger share once premiums are equalised.

Who pays if one owner cannot afford their share?

That is a matter for the owners' own agreement, and it can affect whether the arrangement stays balanced. A broker can explain the options on the free call-back, and an accountant or solicitor should confirm the tax and legal side.

To have a broker ring you about your own company, complete the form on this page. Wider options for companies and partnerships sit in the business cover guides.

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