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Shareholder

Equalise premium calculator

The formula below can be extended to cater for any number of shareholders and assumes that each will buy the deceased's shares in proportion to their existing share of the business.

Formula
'A' should pay =
A's share of business  x  B's premium  +  A's share of business  x  C's premium
(Total value of business  –  B's share) (Total value of business  –  C's share)
'B' should pay =
B's share of business  x  A's premium  +  B's share of business  x  C's premium
(Total value of business  –  A's share) (Total value of business  –  C's share)
'C' should pay =
C's share of business  x  A's premium  +  C's share of business  x  B's premium
(Total value of business  –  A's share) (Total value of business  –  B's share)

    Example (please complete all required fields):


    Smith & Jones Plumbers Ltd
    £
    Director's retirement age:

    Directors
    John Smith, , %, £
    Fred Smith, , %, £
    Bert Jones, , %, £
    The policies John Smith Fred Smith Bert Jones
    Policy years
    A policy years
    B policy years
    C policy years
    Sum assured
    A sum assured
    B sum assured
    C sum assured
    In trust for:
    Fred Smith and Bert Jones
    John Smith and Bert Jones
    John Smith and Fred Smith
    Yearly premium
    A premium
    B premium
    C premium

    Using the formula above, the equalised premiums are calculated as follows:

    John Smith
    A share  x  B yearly premium  +  A share  x  C premium
    (Total value of business  –  B share) (Total value of business  –  C share)
    =  Result 1
    Fred Smith
    B share  x  A yearly premium  +  B share  x  C premium
    (Total value of business  –  A share) (Total value of business  –  C share)
    =  Result 2
    Bert Jones
    C share  x  A yearly premium  +  C share  x  B premium
    (Total value of business  –  A share) (Total value of business  –  B share)
    =  Result 3
    Total premiums:
    =  Result 4

    The equalisation calculation is therefore:

      Actual cost Equitable cost Difference
    John Smith
    A yearly premium
    Result 1
    Diff A
    Fred Smith
    B yearly premium
    Result 2
    Diff B
    Bert Jones
    C yearly premium
    Result 3
    Diff C
    Totals
    Premium Sum
    Result 4

      In practice, the equalisation payments would usually be done by adjusting the director's loan accounts rather than by cash settlements. These are of course transfers of value for inheritance tax purposes but they'll usually be covered by either the small gifts exemption of £250 or the yearly exemption of £3,000. Alternatively, it could be claimed they're exempt as a bona fide commercial arrangement.

    These are only guidelines. Underwriters usually want to establish that the cover is reasonable, so it's about building the case and justifying the level of cover.