If you become seriously ill or die, this insurance will pay a lump sum of money to the other shareholders.
What happens if you die?
Normally, when a shareholder dies, their interest in the business passes into their estate. This is normally your family.
Usually, your family won’t want the shares. The other shareholders probably don’t want your family to have them either.
Your family will want to realise the value, by way of cash. The other shareholders will therefore have to find the money to buy your shares off of them.
What happens if you’re ill?
If you are too ill to continue working, you’ll start discussions about how you can exit the business. Doing this is probably going to mean selling your shares to the other shareholders.
If you do not have the money within your business to afford to buy one another’s shares, you will need to get the money from somewhere. In both events, shareholder insurance pays a lump sum that allows this transaction to take place.