What’s The Best Insurance Policy For Partners?
What’s The Best Insurance Policy For Partners?
You have a thriving business with your partner.
You love what you both do together and the future of your business looks bright.
Suddenly, and often without warning, things change quite rapidly. You may already have experienced that in your business with clients, customers, even staff.
Nobody likes to go there, but what if the unthinkable happens, and your business partner is diagnosed with a terminal illness or even passes away suddenly? It’s probably the biggest single event that could shape the future of your business, or even destroy it completely.
Why Do I Need Partnership Protection?
Without any planning involved, when a partner dies, the partnership is dissolved and the estate of the deceased partner is entitled to the value of the partner’s shareholding and has several options.
For you this could mean:
● Forcing a sale of the business to pay off the estate, perhaps for less than the true value of your business.
● Forcing a sale of some assets to pay off the estate.
● Taking out a loan to pay off the estate, which will be dependent on your credit rating.
● Selling off the share of the business to a new partner.
● Coming to a repayment arrangement with the estate.
● A member of the estate becoming involved in your business if they want to keep the shareholding.
Sadly, the odds of you having no business at all are really high and the impact on your life would be significant. It would leave lots of big decisions to be made that you’d definitely prefer not to be making.
How would you provide for the future? You may have to look at starting a new business or potentially going back to working for someone else for a living.
Maybe you’d be left with a business that has fewer assets than it used to, impacting the future value and growth of the business?
You may have to scale back operations or services offered. You could be left with a large loan from the bank to repay (amounts would then depend on your credit rating) or to be making regular payments to the estate.
If the estate sells their share of the business, you could end up with a new partner who you may or may not like or trust, which would change the entire dynamic of your business. You may become the lucky ‘winner’ of a member of the estate’s family calling the shots on the business they had no involvement in building and are likely to know nothing about.
They’re all very sobering thoughts but they are all dramas that can very easily be avoided by taking out Partnership Protection.
What Is Partnership Protection?
Partnership Protection is a type of arrangement which typically involves both partners having life insurance, or life insurance and critical cover insurance policy, written under trust so that the proceeds go to the other partner in the event of being terminally ill or deceased.
This means that in the event of death or diagnosis, the other partner will have the funds to buy off the estate of the deceased partner and have full control of the business they helped build. The estate is given a payment reflecting the value of the business and the nightmare scenarios above won’t come into play.
It is a simple arrangement that serves the interests of everyone involved.
You get control of the business.
The estate of the deceased partner gets a payment based on the value of that shareholding.
It is a win-win situation for both of you.
It is a total game-changer losing a business partner. Not only will you be dealing with the loss of a core colleague, but you’ll also be thrust into running your business in a very different way.
Partnership Protection is the difference between you knowing you have the solutions in hand, or you sailing a sinking ship. We’d say It is peace of mind that money just can’t buy, but in this instance, you can. And we’d be as bold as to say, you’ll definitely wish you had if you ever find yourself in these unfortunate circumstances as we see it very often.
What Types Of Partnership Protection Agreements Are There?
There are different types of agreements which are better suited to different situations so it’s important that you make sure you take out the right type of agreement. This can be critical to the future of your business and how it performs and grows.
A Single Option Agreement creates a ‘sell’ option for the partner affected but no automatic ‘buy’ option for the other partner. This means that in the event of a critical illness the diagnosed partner can’t be forced to sell to the other partner against their will if they want to continue working.
A Double Option Agreement creates both a ‘sell’ option for the affected partner and a ‘buy’ option for the other partner. In this instance, if the remaining partner wants to buy, the affected partner must sell. If the affected partner wants to sell their share, the remaining partner must buy. If neither side executes their rights, the deceased’s estate becomes the new owners of the business shares and can then sell on the open market if they want to.
How Do I Know How Much Partnership Protection I Need?
One decision that needs to be made at the outset with insurance policies like these is the value of the business in the event that a claim is made.
The value of the business can be determined by using the average profits multiplied by a fixed number of years. This is usually the most accurate way of valuing the business.
It can be a goodwill calculation too where all parties look at what would make the ongoing running of the business much easier for the remaining partner.
Another method is to use the value of net assets. Each method affects the cost and impact of how effective the policy would be when paid out so this is where our team can help you explore which would be the best options to take for your own circumstances.
There are other decisions to consider as you go along…
What happens if a new partner joins the business? If another partner comes on board, you’ll need to adjust the shareholding and include this partner in the trust. If one partner dies or becomes critically ill, the other partners can get together and buy the shares of the affected partner.
What if one of the partners leaves the business? If there are two partners and one leaves the business, this would end the arrangement. The life policies taken out would then revert to personal life cover.
If there are more than two partners and one leaves the business, you can adjust the shareholding and trust accordingly and the arrangement would continue.
To get the best from your financial decisions, it always makes sense to speak to a financial advisor to get the best advice for your circumstances. Our team here at Apex has the expertise and experience to know what you’ll need to consider in advance and can tailor your policy to your needs.
We can help you decide with confidence the amount of protection you’ll need, the term of the agreement, and help you navigate the adjustments as you go along if any changes need to be made. If you’d like to discuss how to keep your business and livelihood safe if you or your partners are diagnosed with a critical illness or pass away, get in touch and our friendly team will be happy to help.