Two people build a business together for fifteen years. One of them has a stroke on a Tuesday. By Friday, the healthy partner is running the whole company alone, and by the end of the month they are in a negotiation nobody prepared for: buying out a share of the business from a family in crisis, at a price nobody agreed, with money nobody set aside. Every partnership will end one day. The only question is whether the ending is funded and priced in advance, or improvised in the worst month of someone’s life.
Three of the four exits can be funded by insurance; the fourth cannot
A partner leaves a business one of four ways: death, permanent disability, serious illness, or choice. Insurance can fund the first three. Life cover pays out on death, total and permanent disability cover pays when a partner can never work again, and trauma cover pays on defined events like cancer, heart attack and stroke, which are far more common in working life than death. Serious illness is the exit partnerships most often leave uninsured, and it is the one where the departing partner is still alive, still an owner, and still needs the money.
The fourth exit, a partner simply deciding to retire or move on, cannot be insured. It needs a different funding plan, usually vendor terms paid from profits or bank finance, and it belongs in the same agreement so nobody is negotiating it from scratch either.
The agreement sets the price and the trigger before anyone is grieving
Insurance without an agreement is just money arriving into an argument. A buy sell agreement, drawn by a lawyer, does three jobs. It defines the trigger events, so everyone knows in advance exactly what circumstances put the transfer in motion. It sets the valuation method, a formula or an independent valuation process, so the price is mechanical rather than negotiated under pressure. And it obliges both sides in a mandatory transfer style agreement: the outgoing partner’s estate or family must sell, and the remaining partner must buy, at that price, funded by the insurance proceeds. Some agreements use put and call options instead, giving one or both sides a right rather than an obligation, so the mechanism should match what the partners actually intend.
Picture two partners in a business worth $3 million, holding half each, with $1.5 million of cover on each life matched to the agreement. When one dies, the insurance pays $1.5 million, the agreement moves the equity, the family walks away with full value in cash, and the survivor owns the whole company without borrowing a dollar. Without that structure, the survivor’s new business partner is a grieving spouse who may need income the business cannot spare, or the estate forces a sale of the whole company to get the family its money.
The numbers need maintenance. A business worth $3 million today may be worth $5 million in four years, and cover that no longer matches the valuation clause leaves a funding gap that lands on the surviving partner personally. Review both together, every year.
Get the policy owner wrong and part of the payout can go to the tax office
Who owns each policy decides how the payout is taxed, and this is where well meaning arrangements come apart. Death cover proceeds are generally tax free to the policy owner. Total and permanent disability and trauma proceeds are tax free only when the policy is owned by the insured person or a relative. Have the company or the other partner own those policies, a structure that sounds sensible around a boardroom table, and capital gains tax can claim a slice of money that was measured to fund the full buyout, leaving the deal short exactly when it has to settle.
The common clean route is each partner owning their own policies, with the buy sell agreement directing what the proceeds must do. Superannuation needs particular care here. A super fund generally cannot take out new trauma cover, since a trauma event does not line up with a condition of release, and the tax office has separately found some SMSF owned life insurance tied to a buy sell agreement breaches the rules where the structure benefits another owner rather than the fund’s own member. Cheaper premiums inside super are not worth that risk, so ownership, agreement and tax treatment need to be designed as one piece, with the adviser, the lawyer and the accountant in the same conversation before anything is signed.
None of this is really about insurance. It is succession planning for the version of the future nobody wants, and its value shows up on the day the phone rings. The partnerships that handle that day well decided everything years earlier, put funding behind the decision, and reviewed it every year while both partners were healthy enough to shake hands on it.
This article is general information only and does not take into account your objectives, financial situation or needs. Consider whether it is appropriate for you and seek personal advice before acting. Build MyWealth (Accounting Cloud Pty Ltd) is a Corporate Authorised Representative (No. 1306106) of Lifespan Financial Planning Pty Ltd, AFSL 229892.
