Partnership Protection Cover
For a business, it is imperative that financial security is maintained at all costs, and one of the cornerstones of achieving this is continuity. With this in mind, a partnership agreement is typically signed that guarantees the continuation of the business if one of the partners dies. Without this, then, under the 1980 Partnership Act, the business in dissolved automatically. Partnership Protection is an essential part of this continuation because if it is taken out, there are funds available. Partnership protection funds ensure that on death, there is sufficient capital available within the company to buy the deceased partner’s share.
Definition of Partnership Protection Insurance
Partnership Protection Insurance is purchased to help a partnership continue its operation in case of the death of a partner. This will ensure there is enough capital released to enable surviving partners to purchase the deceased partner’s interest in the company.
Why is Partnership Protection Cover so important?
There are huge risks to continuity if some form of Partnership Protection Cover is not taken out. Without cover, the deceased partner’s share in the firm could well go to his next-of-kin. In many cases, this would not be a satisfactory outcome for any of the parties, as family members may not have any experience in running a business and may prefer to have received a lump sum. Even if the partnership is not very successful, the amount of money needed to buy out one of the shares could be beyond the means of the other partners. This applies in particular to start-ups that have not had the time to build up capital.
It could be that the share goes to a less than desirable new partner who does not have the same objectives as the other decision makers in the firm.
Setting up Partnership Protection Cover
Partnership Protection can be achieved very easily by:
- Acquiring a life assurance policy on each of the partners. This should take into consideration the value of each share so that it pays out adequately.
- Making sure that policies are placed in trust so as to avoid taxation
- Taking out Cross Option Agreements. These are desirable at the inception of the policy to ensure that each holder is legally obliged to sell to the remaining partners on death
Conclusion
Partnership Protection Insurance brings with it peace of mind, but can be complicated to set-up. Because of this, it is wise to obtain expert advice.