Partnership Insurance

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Partnership Insurance

Usually, partnership insurance plans are simple cross-purchase policies whereby one partner buys individual policies on each of his partners for the equivalent of each of their share capital (or share value at time of taking up the plan).

Trust Company – Can be set up by the partners as a separate company, e.g. ABC Trust Company. The ABC Trust Company then purchases policies on each of the partners. There will be one policy for each partner – owned by the Trust Company for the benefit of the beneficiaries (the Partners). Upon a claim, the tax-free proceeds are paid to the Trust Company. The surviving beneficiaries receive the cash proceeds and then, under a Buy-Sell agreement, purchase the deceased partner’s share from his / her Estate. The purchased share is then distributed equally, or in proportions specified in the written terms of the Buy-Sell agreement, among the surviving partners. This method eliminates the need for multiple policies to be bought by each partner. As with all recommendations, you, as the agent, are reminded to check with your principal company as well as your lawyer (who has to be familiar with company regulations as well as insurance practices) on the feasibility of your proposals.

The Buy-Sell Agreement – This legal agreement should be properly drawn up by a lawyer who is familiar with such procedures as well as the importance of funding such as arrangement.

Points to be included in agreement:

• How the business is to be valued – an agreed purchase price to be reviewed regularly.
• Surviving Partners are to purchase Deceased’s Partner’s share from his/her Estate.
• Surviving Partners are to assume all debts & liability of the business and discharge the Deceased Partner’s estate from any further legal obligations thereafter.
• The partners are to bind their Estates to the sale of their respective shares in the event of death.
• Agreement on how this purchase is to be funded. (This is where the method of funding using Life Insurance has to be agreed upon).

When funding by Life Insurance:

• Ownership & maintenance (premium payments) should be specified.
• If sum assured is to be reviewed regularly to reflect the value of the business shares.
• How insurance cash values is to be disposed of in the event the Partners retire.
• How the life insurance policies (on the lives of the Surviving Partners) now owned by the Deceased’s Estate should be disposed of.
• Should there be an excess or a shortage (proceeds not corresponding with share values), an agreement on how the difference is to be settled.

Any policy may be used to fund the agreement. However, permanent plans with major illness cover are recommended. Partners, who are critically ill or become totally & permanently disabled would likely be unable to contribute to the business anymore and should therefore, be encouraged to sell-out to the surviving contributing Partners. In exchange, the cash proceeds the afflicted Partner receives for his business share can help him /her tide over hefty medical treatments and other costs involved in making the sudden change in lifestyle.

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