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 or Unanimous Shareholders Agreement (USA), be in place. This ensures that there will be an orderly transfer of shares upon retirement, death, a disability, bankruptcy, or matrimonial breakdown and protects the partners in a company. The buyout of shares in a USA can be funded by the cash in a company or sale of assets both of which can affect the company's ability for the business to continue going forward. Another more popular and cost effective way is with the use of life insurance.
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 can be limited. The loss created by the loss of a key individual in the business can effect revenues, moral and profits.
Another big stressor is the reality of dealing with the beneficiaries or the estate of the deceased. In this 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 presents 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—which is great 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. Speak to your accountant to find out which method is most appropriate for your company.
For advice on the insurance portion of your Buy/ Sell agreement or USA, call one of our financial Advisors on the different types of insurance designed to protect the shareholders of a company!
Written by Tab Pollock - Financial Advisor /Partner
Neil & Associates (2006) Inc.