The importance of Buy/Sell Insurance

As a business owner, you know that your business isn’t just about work – it’s your life and your livelihood.

So that means your share in your business is one of your family’s most important assets. It funds the lifestyle that you enjoy today – and will continue to enjoy into the future.

A business succession plan is vital to ensure your family is protected in the event you, or one of your business partners, become ill or injured and are unable to stay in the business.

Buy/sell insurance is a mechanism that provides funds for remaining partners to purchase a business share

from a departing co-owner, in the event of death, permanent disability or critical illness. It means the remaining owners can quickly and efficiently acquire the departing owner’s share and continue running the business with minimal disruption.

Buy/sell insurance benefits both the remaining owners and the departing owner.

For the remaining owners, it provides funds to transfer the business share to them, ensuring that the business is not placed at risk. For the departing owner, or their estate, buy/sell insurance means that they receive funds to compensate them for transferring their business share – just as though they’ve ‘sold’ their share in the business.

Types of Insurance

There are three types of risks that can be covered by buy/sell insurance. You can take out cover for the death, total and permanent disablement (TPD) or critical illness (trauma) of a business partner.

As everyone’s circumstances are different you should speak to your risk adviser about what types of cover

are suitable for your business, and how the insurance package may be structured.

Transfer Agreements

Obviously, death is generally an automatic trigger to transfer a business share. However, temporary incapacity or the suffering of a trauma incident may not be. The legal agreement would usually specify that the transfer of the business share should happen if the insured person is absent from the business for more than a certain period of time, or with a loss of turnover.

A transfer agreement is a legal document. Your solicitor can advise you of the appropriate legal agreement needed to transfer a business share.

Ownership of the Policy

There are several options available when it comes to policy ownership, and your risk adviser can help you understand the right ownership for your situation.

Your risk adviser, accountant and solicitor can advise you further on the implications of the various ownership options.

Business Valuations

An important part of a buy/sell agreement is the valuation of your business.

It is important to ensure the value of your insurance policies keep pace with changes in the business value, so you don’t get caught short if you need to effect your buy/sell agreement.

You should also consider any capital gains tax that may apply when you receive the insurance proceeds and transfer the business share.

Your accountant can advise you on the valuation of your business and ownership shares.

The Importance of Getting the Right Information

You don’t need to make decisions about buy/sell insurance on your own.

Designing an effective buy/sell insurance package requires your risk adviser, accountant and solicitor to work together. Each professional brings their own unique skill sets.

While we cannot provide personal advice can assist with the implementation of insurance once you know what you need.

General Advice Warning:

The information contained within this website does not consider your personal circumstances and is of a general nature only. You should not act on it without first obtaining professional financial advice specific to your circumstances or you may make a decision that is not in your best interests.