If a business partner dies or wants to leave the partnership when they are diagnosed with a critical illness, most partners will want to buy the affected partner’s share in the business and keep control. But only a few will have enough cash to do so.
Partnership protection is taken out to ensure that funds are available to allow the remaining partner(s) in a business to buy a partner’s shareholding if they die, become terminally ill or suffer a critical illness. This in turn gives each partner the security of knowing that their beneficiaries or personal representatives will have a ready and willing buyer instead of having to maintain an interest in the business.
Partnerships come in different shapes and sizes but the Partnership Act 1890 defines a partnership as “the relationship which exists between persons carrying on a business in common with a view of profit”. The Act also provides a basic framework for people trading in partnership. For example, Section 33 of the Act states the partnership will be dissolved on the death of a partner.
Each partner takes out a life or life and critical illness policy and writes it into trust for the benefit of the other partner(s). Or, if there are just two partners, they can each set up a personal life of another policy.
The individual partners pay the premiums. Since premiums reflect the age and sums assured of each individual partner, the amount each individual pays does not necessarily reflect the benefits they would receive in the event of a claim. However, you can adjust the premiums to reflect each partner’s share in the business.
In the case of Limited Liability Partnerships (which are recognised as legal entities), the business can own the policy on the lives of its partners.
All partners will need to enter into an agreement that if one of them dies, the remaining partners can buy their interest from their personal representatives. Likewise, they agree that if one of them suffers a critical illness, the affected partner can choose to sell their interest, which the remaining partners will then be obliged to buy. These are called double and single option agreements.
Download the Business Protection Adviser Guide for help with the following: