Buy Sell Insurance

It helps provide funds so the surviving business owner can purchase the shares of the outgoing business owner, who cannot continue on in the business due to critical illness, total and permanent disablement or death.

This hopefully provides a seamless transition of business ownership.

Without an appropriate agreement and insurance in place, either the surviving business owner would need to fund the purchase of the shares themselves or will be partnered in a business with the previous business owners family or estate.

While Revenue Protection which protects for loss of revenue and Capital Protection which helps cover outstanding business loans are generally owned by the business, Buy/Sell agreements are generally owned individually by the partners in the business.

If this is not possible, the business owner, accountant or an adviser can do the valuation – however the methodology must be shown.

When conducting the valuation it is vital to understand:

You may be required to provide business profit and loss statements and balance sheets for several years in order to get an accurate valuation.

Unlike life insurance and TPD Insurance, if a person makes a claim on a trauma policy due to a critical illness, there may be potential for that person to return to work at some point. Therefore a number of considerations need to be made when entering into a Buy/Sell agreement with trauma cover.

Any agreement will generally need to stipulate the criteria for a business owner to leave the business if they suffer from a critical illness.

Policy Ownership

There are a number of options when it comes to Policy Ownership:

Individual Ownership

Each business owner owns their own policy

Trust Ownership

A trust owns the policies of the business owners

Superannuation

The policy is owned by a superannuation fund

Cross Ownership

Each business owner owns the insurance policy of the other business owners.

If a cross ownership structure is decided upon, you need to be aware of the possible implications, especially if there is a vast difference in the age and health of the business owners.

A cross ownership structure means you are the policy owner and your business owner is the life insured, with the premiums being paid by you personally.

As the age and health status can differ between the two business owners, the premiums could be very difficult.

Two options to consider are:

Tax

Generally, as a buy/sell agreement does not protect against the loss of revenue, the premiums are not tax-deductible. However, any benefit paid out is generally not tax assessable.