Partnerships also come with risks. In case one partner dies, the surviving partner will suddenly find himself in business with the spouse or family members of the deceased partner. The situation may be amicable or unpleasant, but the option for a buy-out must be available. The cost of buying out a deceased partner’s interest will require funds and a lack of funds can turn the situation into a hostile one in just a short period of time, partnership insurance can prevent this from happening.
Partnership insurance is designed to protect a partnership in the event a partner dies or becomes disabled to ensure the survival of the business entity. This type of insurance generally uses two plans. In a cross-purchase plan, each of the partners, as a beneficiary, buys a life insurance policy on the other partner. In case of death or dismemberment, the life insurance payout is used by the other partner to buy out the other partner’s interest in the business. This works well for businesses with only two partners. In contrast, an entity plan is designed for companies with multiple partners. The partnership buys a life insurance on each partner with the partner as the beneficiary. In case of a partner’s death, the partnership uses the insurance payout to buy out the deceased partner’s shares.
When one of the partners is diagnosed with a trauma condition and survives, the buy-out issue still needs to be resolved. Funding will be required to buy out the partner’s shares and a lack of funds can cause havoc in business relationships and financial difficulties for the business and the partner that has been diagnosed. The stress on the partner and his family can be tremendous.
Partnership insurance should be included in a business partnership agreement and estate plan. It is also best to document it in minutes of a company meeting and reviewed annually to reflect current business worth and life insurance premiums required. This will ensure appropriate use and purpose for the cover and for taxation purposes.
Find out how partnership insurance can ensure smooth transition of stock ownership for the continued survival of the company in the event of a partner’s death or diagnosis for a critical condition.