Your Shareholders' Agreement: When Did You Last Read the Insurance Clause?
The insurance clause in a shareholders' agreement says what happens to an owner's shares if that owner dies or can't work, and where the money to buy them comes from. Many Ontario partners signed theirs years ago and never checked it against the policies they actually hold. Year-end is a good time to read it, because you are already looking at share values and next year's plans.
Why read the clause before year-end?
Most corporations review their numbers in the last weeks of the year. The accountant asks about profit, salaries and dividends. That is also the moment you know roughly what the business is worth, which is the number the insurance clause depends on. If the company has grown and the coverage hasn't, the gap is easiest to see now.
Life also changes the picture. A new partner joins, a partner sets up a holding company, someone signs personally for a new business loan, or the family situation changes. Each of these can leave an older clause pointing at the wrong owner, the wrong amount or the wrong company.
What should the insurance clause say?
Every agreement is different, and your lawyer drafts the wording. When we read one with an owner, these are the points we look for:
- The trigger. Does the clause cover death only, or also long-term disability and critical illness? If disability is covered, how is it defined, and how long must a partner be unable to work?
- The buyer. Do the other shareholders buy the shares personally, or does the corporation buy them back?
- The price. Is it a fixed number, a formula, or a value the partners sign each year? When was it last updated?
- The funding. Does the clause require insurance? For how much, and does it say what happens if the payout is less than the price?
- Policy ownership. Who owns each policy, who pays the premiums and who is the beneficiary? Does that match the buyer named above?
- Holding companies. If a partner's shares now sit in a holding company, does the clause still work?
- Leaving the business. What happens to a policy when a partner sells or retires? Can that person take it over?
- Timing. How quickly must the purchase close after a death, and what does the family receive in the meantime?
Which gaps show up most often?
The most common one is a clause that requires insurance when no policy was ever placed, or a policy that lapsed and nobody noticed. The second is an old value. A business valued years ago at a fraction of today's worth can leave the family underpaid or the partners borrowing to cover the difference.
We also see policies owned by the wrong entity. The money lands in the operating company while the agreement says the partners buy personally, or the reverse. Disability is the quiet gap: many agreements mention it, but life insurance pays only on death, so nothing funds a buy-out if a partner can't work for a long time. Our buy-sell insurance guide explains the two common funding setups in more detail.
Who should own the policies?
This decision belongs with your accountant and lawyer, because it affects who receives the money and how it can move afterwards. When a private corporation owns the policy and receives the death benefit, part of it can usually be added to the company's capital dividend account. The exact result depends on how the policy and the agreement are set up, so we show the options side by side and let your advisors choose. We don't give tax or legal advice.
What if a partner gets sick or can't work?
A long illness can be harder to handle than a death. The partner still owns shares, can't work, and may need money, while the other owners need to keep running the business. Some agreements deal with this through a disability buy-out clause, funded by disability buy-out insurance or by critical illness insurance that pays a lump sum on a covered diagnosis. These products have waiting periods and definitions that should line up with the wording in your agreement.
What should you bring to a review?
- The signed shareholders' agreement and any amendments.
- The latest valuation, or the value the partners last agreed.
- The share register, including any holding companies or a family trust.
- The current policies on each shareholder, with owner and beneficiary pages.
- Any business loans the owners have signed for personally.
For the first conversation you don't need to send any of these. Bring them to the meeting, or keep them at hand on a video call.
How does WealthPillar help?
We read the clause first, then compare it with the policies you already hold and the value your partners agree. If there is a gap, we set out the coverage options and their costs in writing, and every insured partner sees the same numbers. You speak with Chirag Kalra, a licensed life insurance advisor in Ontario, at our office at 181 Queen Street East in Brampton or by video call. WealthPillar is paid by insurer commission when a policy is placed. Coverage is subject to underwriting and insurer approval.
Ontario corporations can also have a unanimous shareholder agreement under the Business Corporations Act, and the Financial Services Regulatory Authority of Ontario publishes guidance on working with a life insurance agent, including the needs analysis that should come before any recommendation.
General education only; not individualized insurance, financial, tax or legal advice, or a recommendation to buy, replace or cancel a policy.
