Partnership Insurance is a life assurance policy taken out to protect business owners and their financial dependents in the event of one of the partners dying suddenly. This can be set up either with each partner taking out a life policy in trust for the other partners, or the partners take out a policy on the life of each individual partner.
Why does my business need it?
In the event of one of the partners dying suddenly, there will be issues not only for that individual’s financial dependents, but also for the surviving business partners.
For the surviving partners; they may be bound under their partnership agreement or by underpinning legislation to pay a lump sum to the deceased’s estate in respect of their share of undrawn profits, fixed assets, goodwill and the balance of their capital account.
For the individual’s dependents; they may have an urgent need to receive a lump sum from the surviving partners. If they cannot find the necessary capital to pay this liability, they may attempt to spread the payments over a number of years and in some cases, this may not be possible either. The dependents may have to wait for a significant period of time to obtain their fair value, which could have serious financial implications for the deceased’s family.
What are the benefits of Partnership Insurance?
In the event of an insured partner dying, the proceeds of the policy are used to purchase their shares from their personal representatives, giving the financial dependents immediate value for the shares and allowing the surviving business partners retain control of the business, without the need to resort to borrowings or the sale of assets.
How is the policy set up?
Most partnerships have a partnership agreement in place to deal with the responsibilities of the partners in the operation of the business and how the partnership survives in the event of the sudden death of one of the partners. This agreement should also specify an obligation on each partner to arrange a life policy for the benefit of the other partners.
This policy can be arranged in a couple of different ways; each partner can take out a policy in trust for the others, or the other partners can take out a policy on each individual. Each option has its merits and your MoneyCoach advisor can help you establish which policy is the most suitable and cost effective for your particular needs.
A Buy/Sell Agreement must be drafted and signed by all participating partners which can be enforced by either party to it. Effectively, in the event of a partner dying, the surviving partners must purchase the deceased’s share in the practice, and their personal representatives must sell.
How much cover do we need?
Each policy should equate to the estimated current value of each individual’s share of the practice, based on the obligations the practice has to the partner under the partnership agreement. You may need your accountant to provide you with a valuation for this purpose.
Are the proceeds taxed?
The proceeds are not normally taxed in the hands of the policy owner where they are used to purchase shares from the deceased’s personal representatives on an own life in trust, or life of another basis.
In certain circumstances, there could be an inheritance tax or capital gains tax liability for the deceased director’s financial dependents.
Are the premiums eligible for tax relief?
No, the premiums do not qualify for relief from personal income tax
Next Steps
You need to talk to one of our advisors who will help you establish your needs and which route is the most appropriate for your circumstances. If you do not have a partnership agreement in place you will need to talk to your accountant or solicitor to draft a suitable agreement on your behalf. The decision to take out this type of insurance should be recorded in the minutes of a partners meeting.
Please contact us on 01 669 1040 and ask to speak to one of our experts on Business Protection or complete the Quick Enquiry form and we will call you back.
