When anyone thinks of life assurance and/or serious illness cover, it is usually in a personal capacity as a protective measure for a one’s family within the home or perhaps as an employment add-on. Yet, an underutilised and often overlooked practice is the application of these cover types within a business arrangement. Let us take a closer look at Partnership Insurance in practice.
Why Partnership Insurance is necessary
In an unlimited liability partnership, all profits, losses and importantly debts are the personal liability of each partner, and each is fully liable for the business actions of the other partner. In such circumstances it is prudent that Partnership Insurance be put in place to pre-empt the sudden death of either partner. Partnership Insurance is a form of Life Insurance that provides compensation to the remaining Partner in this event in order to allow them to buy the deceased person’s share of the partnership from their next-of-kin.
The Benefits of Partnership Insurance
- The proceeds can be used to cover the costs of undrawn profits.
- It provides the surviving partner with the immediate means to forward to the deceased’s estate.
- It allows for the option for the deceased successor to not be involved in the business upon their partner’s passing. Even though technically the partnership is dissolved on the death of a partner the rights and liabilities of the deceased partner passes effectively to their estate.
How does Partnership Insurance Work?
A Partnership Legal Agreement is normally drawn up specifying the precise entitlement of each partner’s estate in the event of death and conduct of business rules and obligations of each partner. The agreement would state that each partner would affect a life assurance plan on their own life for the benefit of the other partners which would be payable to their estate on death. The life assurance itself could be arranged on a ‘Life of another’ basis ensuring the other partner and the plan owner would pay the premiums to fund the policy.
Alternatively, the policy could be set up on an ‘Own Life in Trust’ basis and funded specifically by each individual partner. This means that the individual policies are written under trust for the benefit of the other partner. It is recommended that legal and tax advisers are consulted in the establishment of this cover type.
What is the tax treatment of Partnership Insurance policies?
Under the ‘Life of another’ arrangement the proceeds are free of tax in the hands of the plan owner provided they were the premium payer. Capital gains and inheritance tax do not apply in this instance. Under the ‘Own Life in Trust’ arrangement no CGT or Inheritance tax applies either as long as the proceeds of the plan are paid to the Trustee(s).
The setting up and advising of Partnership Insurance has been a practice of Aspire Wealth Management for many years. Contact us today on 01-8455827 or email Advice@aspire-wealth.com to talk through your unique circumstances and how Partnership Insurance can fit into your business arrangement with your Partner.
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