Partnership protection is appropriate for businesses operating as a ‘partnership’ as defined by the 1890 Partnership Act.
Under this act, unless the partnership is set up to say otherwise, the partnership must be dissolved in the event of the death of a partner. The powers from the deceased partner transfer to their heirs.
This can lead to two difficulties:
- Ensuring that the partnership can continue when a partner dies
- That the surviving partners can retain control of the partnership.
These difficulties can be overcome through the creation of a Partnership Agreement which will state that the partnership doesn’t need to be dissolved and that the surviving partner(s) can purchase the deceased partners shares if they want to.
In addition to the partnership agreement there should be either a ‘buy and sell agreement’ or a ‘cross option agreement’ or an ‘automatic accrual method’ set up.
For any of those to work it is necessary for Life Insurance to be put in place to provide the funds for the surviving partner(s) to be able to purchase the partnership share, unless sufficient funds are already held.
Shareholder Protection is appropriate for small businesses operating as a private company where there are directors and shareholders.
It is similar to Partnership Protection, but without the requirement for the surviving shareholders to buy the deceased shareholders shares from their estate.
Problems which can arise are:
- Possible financial issues for the deceased’s family where there is no ready market to sell the shares or where there are restrictions on the transferability of shares as detailed by the company’s Memorandum or Articles of Association.
- The surviving shareholders can find themselves sharing the control of the business with the deceased’s heirs who may know nothing about their business.
As with partnership protection a life insurance plan would provide the funds for the surviving shareholders to purchase the shares from the deceased shareholders estate.
Key Person Protection
Key person insurance is to protect your business against the financial losses that could result from either the serious illness or death of someone who is employed in your business.
Whilst companies automatically insure the buildings they operate from, or the cars they drive, many do not consider one of the most important elements of their business, its people.
A key person is anyone who has specialist skills or knowledge, or specific areas of responsibility who’s loss would negatively affect the company financially.
Key person insurance is relevant when that key person could not quickly and easily be replaced. Whilst everyone is ultimately replaceable, the time it could take to replace them would be detrimental to the business.
Key person insurance provides the cash to ensure that profits are maintained whilst you replace them.
When thinking about key person insurance you need to consider the following:
- What are the potential problems your business could encounter after losing a key person?
- Can these potential problems be insured against?
- What level of profit would you expect to lose?
- What additional costs will you incur such as recruitment, training, loss of goodwill?
- How long do you need the cover to be in place for?
Our advisers at TFA will, using our financial planning process work through these areas with you and help determine the type of term the plan needs, how the plan is to be set up and what the tax situation will be.
The provision of Key Person insurance is complicated and requires a methodical approach. Our advisers are ideally placed to assist you in this, ensuring that you get the best cover for your needs.
For Partnership, Shareholder and Key Person protection, the type of life insurance plan and length of term will vary.
Our advisers at TFA will be able to help you with both of these types of protection, engaging with the relevant legal professionals where required and in ensuring that you secure the correct life insurance for your needs.