Partnership Protection (Buy/Sell insurance) - What is it?

Paul Davies | February 20, 2017

BUY/SELL INSURANCE: What is it and do you need it?

This is a type of protection that is taken on owners within a business.

It is lump sum will be paid in the event of their death, disability or traumatic event to pay out their estate.

Example: 3 partners own equal shares in ABC Pty Ltd.

The first partner unfortunately dies and that share of the business is left to the estate, which gives authority to the beneficiaries. In this example, the wife of the late partner now owns a third of the company, but has never had experience in any field associated with the business.

There are a few things that happen to the business from this stand point:

1. The remaining partners may not have a good relationship with the spouse who now has full voting rights, including taking a salary.

2. Staff morale may be quite low due to the exit of the first partner. Job security is usually high on the thought process. (We arrange a standard communications pack to the staff in the event of a claim to help with this problem).

3. Contacts that had a relationship with the late partner do not wish to deal with the company due to all of the above changes and problems.

The main issue is where do you get the funds to pay for these shortfalls? 

It can either be through a loan (further debt), or simply running the business with that lack of skills from the old partner. In many cases, the business may have to close.

A ost effective solution is a Partnership Protection Policy, or 'Buy/Sell Insurance'. It's very important that this cover is accompanied by a Buy/Sell agreement making the transition of the shares to the remaining partners, and keyman cover will pay the remaining funds to take care of the other issues.

For advice and questions about whether your business and/or partnership needs this, feel free to contact me.