Buy/Sell Insurance Cover is put in place to buy out a partners interest in a business in the event that the partners dies, becomes totally and permanently disabled or suffers a traumatic illness like cancer, stroke or heart attack. Premiums are paid by your company and although they are not tax deductible for this type of insurance, the payout for Life Insurance is also generally not assessable (i.e. no tax payable). In some cases, Total And Permanent Disability and Trauma Insurance can attract tax so the insured amount can be increased to take into account the possible tax implications should a claim arise. Alternatively, the premiums can be paid personally by the insured person.
The Buy/Sell insurance is backed by a legal agreement which stipulates that the surviving family/spouse of the deceased business owner (or the actual business owner in the case of TPD and Trauma), will be paid out the insurance policy proceeds for their interest in the entity. Ownership of the insured's share of the business will then revert to the other owners of the business. Buy/Sell Insurance (with the backing of a legal agreement) is a seamless way of ensuring succession of the business in the event that ill health or injury occurs to one of the business owners. Without this type of agreement and insurances, major issues can arise between family members and business partners in sorting out business affairs and we have seen this all too often.
The major benefit of Buy/Sell Insurance and Agreements is that the surviving business owners are provided with the funds to pay out the ill or injured shareholder or their family - without having to take out significant debt. The other major advantage is that all business partners agree on the value of the business when setting up the insurances and the agreement so there is no dispute regarding the business value at claim stage because all of the owners have agreed with the valuation. The value of the business and therefore the insurances are reviewed every year to ensure they accurate and up to date.
A VFS Adviser can help you put in place a Buy/Sell Business Succession Strategy for you.