Partnership Insurance
Partnership insurance is also known as Shareholder or Buy/Sell Agreement insurance. Where there is more than one owner of a company, it is essential that a Buy/Sell Agreement be in place. This ensures that there will be an orderly transfer of shares upon retirement, death, disability, bankruptcy, or matrimonial breakdown.
Consider the example of a company owned in partnership where one of the partners passes away unexpectedly. Without a Buy/Sell Agreement in place and the life insurance funding for it, the company's survival is threatened. The ability of the company to enter into contracts and borrow money is limited. The vacuum created by the loss of the key individual strains all resources.
Compounding this stress is the necessity of dealing with the beneficiaries or the estate of the deceased. In this latter case, the beneficiaries or estate may have no interest in continuing to be part of the business, and may demand that the full value owing them be paid immediately. In this situation, the remaining owner or owners would be under pressure to settle this debt either from company resources, their own personal assets, or by borrowing from a financial institution. Each of these situations present problems that add to an already difficult situation. Another possibility is having the deceased's family wanting to take an active role in the company—a bonus if they have the skills and the personalities for it, a detriment if they do not.
Once the Buy/Sell Agreement is in place, the insurance funding for it follows. The insurance policy can be corporate owned and individually owned by the shareholders owning policies on each other, known as a criss cross agreement. Tax accountants can best advise on which method is most appropriate for your company.
Partnership Disability Buy Out insurance is similar to a Buy/Sell Agreement. When death occurs in a partnership the Buy/Sell Agreement is triggered, and funded by life insurance. Where a severe disability occurs, provision must also be made for the orderly transfer of shares to the remaining partner(s), and the proper mechanism in place to fund the purchase of these shares from the disabled partner. Disability insurance provides a lump sum or periodic payments to fund that share redemption. Note that there is a waiting period before payments are made, and that this delay needs to be taken into consideration when putting the policy in place.
