Usually, partnership insurance plans are simple cross-purchase policies whereby one partner buys individual policies on each of his partners for the equivalent of each of their share capital (or share value at time of taking up the plan).
Trust Company – Can be set up by the partners as a separate company, e.g. ABC Trust Company. The ABC Trust Company then purchases policies on each of the partners. There will be one policy for each partner – owned by the Trust Company for the benefit of the beneficiaries (the Partners). Upon a claim, the tax-free proceeds are paid to the Trust Company. The surviving beneficiaries receive the cash proceeds and then, under a Buy-Sell agreement, purchase the deceased partner’s share from his / her Estate. The purchased share is then distributed equally, or in proportions specified in the written terms of the Buy-Sell agreement, among the surviving partners. This method eliminates the need for multiple policies to be bought by each partner. As with all recommendations, you, as the agent, are reminded to check with your principal company as well as your lawyer (who has to be familiar with company regulations as well as insurance practices) on the feasibility of your proposals.
The Buy-Sell Agreement – This legal agreement should be properly drawn up by a lawyer who is familiar with such procedures as well as the importance of funding such as arrangement.
Points to be included in agreement:
When funding by Life Insurance:
Any policy may be used to fund the agreement. However, permanent plans with major illness cover are recommended. Partners, who are critically ill or become totally & permanently disabled would likely be unable to contribute to the business anymore and should therefore, be encouraged to sell-out to the surviving contributing Partners. In exchange, the cash proceeds the afflicted Partner receives for his business share can help him /her tide over hefty medical treatments and other costs involved in making the sudden change in lifestyle.
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