How to protect against the passing of a business partner
Business partnerships are a lot like marriages. You see your future together, become quite dependent on each other, and shy away from the thought of your partner no longer being around.
But failing to prepare for worst case scenarios can lead to complications should your business partner unexpectedly pass away. Here’s how you can protect your business with Buy/Sell Insurance.
What is Buy/Sell Insurance?
Buy/Sell Insurance is a relatively simple concept.
Basically, it pays out a lump sum if a business partner passes away or cannot stay in the business due to a serious injury.
With the insurance payout the remaining business partners then purchase the departing owner’s share from their estate – according to a transfer agreement that’s already been drawn up – and continue running the business.
Key benefits of Buy/Sell Insurance
One of the major benefits of Buy/Sell Insurance is that it’s a mutually beneficial policy: both the family of the deceased and the surviving partners benefit from the agreement.
Another key benefit of Buy/Sell Insurance is that the remaining owners don’t have to sell the business (or a good chunk of it) in order to pay out the departing owner’s estate.
It can also help minimise the risk of the departing owner’s spouse, family or estate creating legal issues that could lead to the business’s assets being frozen, or a share of the business being claimed or sold to a third party.
It’s important to agree with your business partners on the value of the business. That’s because this will help you take out an appropriate level of cover.
If you reach a consensus that the business is valued at $1 million, and there’s two partners, the amount insured on the life of each partner should be about $500,000. If there’s four partners, the amount insured on the life of each partner would be $250,000.
You’ll also need to agree on how the policies will be owned.
Policies can be owned individually, cross-owned (owned on behalf of the lives of other owners), or owned via superannuation, a trust, or a trading entity.
Finally, you’ll also need to agree on the types of risks covered.
Options include life insurance (the death of a partner), TPD insurance (if a partner becomes totally and permanently disabled), and/or Trauma Insurance (if they suffer from a heart attack, stroke or cancer).
Robert and Susan are business partners in a private medical practice.
They are both are married with young children and their business is based in a new and growing suburb. The practice is experiencing growth each quarter.
To protect both themselves and their families, they decide to take out Buy/Sell Insurance.
They get a valuation on the business, which comes in at $2 million, so they take out cover for $1 million each.
Both being medical professionals, they are all too familiar with accidents and illnesses. So they take out Trauma and TPD insurance on top of Life Insurance.
When Susan is unexpectedly passes away, her estate receives the $1 million life insurance payout and Robert is transferred her share of the business and becomes the sole owner.
Seek professional advice
There are a whole lot of important factors that need to be weighed up when contemplating By/Sell Insurance, including tax considerations and the set-up structure.
So for more information, get in touch. We’d be more than happy to help run through your options to help ensure your business doesn’t suffer if a partner unexpectedly passes away.
Senior Financial Planner
(CFP® B.Bus (FP) Cert IV FMB)