Buy/Sell Insurance is used exclusively by partners or shareholders of privately-owned businesses who wish to have access to funds to purchase the equity of a business partner who has exited the business due to incapacitation or pre-mature death.

The insurance contracts go hand-in-hand with the buy/sell agreement, which is the legally-binding document that determines the buying & selling process when partners exit.

Three types of insurance contracts are normally used by business owners to fund a buy-out in these circumstances, & they include:

  • Life Insurance – this is the simplest of the insurance contracts as the proceeds are paid to the owner of the policy (or the life insured’s estate) once the insurance company has received the death certificate, the claim form & (normally) the original policy document. Assuming that the buy/sell agreement has been signed by each of the business owners, & is current, then the proceeds of the life insurance policy are paid to the owner or the deceased’s estate as payment (or part payment) for his/her business equity. This equity is subsequently transferred to the remaining business owner/s. This transaction allows the remaining owner/s to retain control of the business, & also ensures that the deceased’s family is fairly compensated for the actual value of his/her share in the business.
  • Total & Permanent Disablement Insurance (TPD) – to qualify for receipt of TPD benefits one must meet the insurer’s definition of ‘totally & permanently disabled’, & although most insurers in Australia have fairly common definitions, many consumers become disgruntled or confused when they try to decipher the differences between being ‘unable to perform your OWN occupation’ & being ‘unable to perform ANY occupation’. It is important that the exit clause on permanent incapacitation within the buy/sell agreement is in alignment with the insurer’s definition for total & permanent incapacitation.
  • Trauma (Critical Illness) Insurance – Although most trauma insurance policies in Australia typically cover 30+ different traumatic events, 93% of all Trauma claims in Australia are for the BIG 4 – Cancer, Heart Attack, Heart-Valve Surgery & Stroke. Business owners using trauma insurance to fund an exit need to obtain advice for the simple fact that a business owner could suffer a traumatic event (e.g. heart attack) but still return to work. In this situation the recipient of the insurance proceeds may be forced to unwillingly leave a business that he/she has helped to build, or may continue unchanged as a part-owner who has simply been paid a lot of money from an insurance company.

From our experience we have found that businesses are adversely affected when:

  • There are Buy/Sell insurances in place but no Buy/Sell agreement;
  • There is a Buy/Sell agreement in place but no, or insufficient insurances;
  • The Buy/Sell insurances and/or agreement are out of date; or
  • Business owners have not even taken exit strategies into consideration.

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