Partnership Insurance: Protecting Business Partners

Partnership insurance answers a question most co-owners avoid when they start out: if one of us dies or becomes seriously ill, who ends up owning that share of the business, and where does the money to buy it back come from?

Without a plan, that question tends to be settled by succession rules rather than by the partners. A share may pass to a spouse, children or a wider family who have no wish to run the company, while the surviving partners have no ready cash to buy them out. In the UAE and Lebanon, where many businesses are owned by two or three founders and heirs may live in different countries, the result can be frozen decisions at exactly the moment the company needs to move. This article explains the mechanics in general terms; it is not legal or financial advice for your business.

How does partnership insurance work in practice?

Each partner’s life is insured for roughly the value of their stake. Alongside the policies, the owners sign a buy-sell agreement, sometimes built into the shareholders’ agreement, which states that on a partner’s death (and, if chosen, a defined serious illness) the remaining partners will buy the share and the estate will sell it, at a price set by an agreed method. The insurance provides the cash; the agreement provides the obligation. One without the other tends to fail: money with no agreement invites negotiation with grieving relatives, and an agreement with no money is a promise nobody can keep.

Every partner is underwritten individually, so full and honest medical disclosure from each one is essential. Any claim is assessed against the policy wording and the information given at application.

Who should own the policies?

The right structure depends on the company, the number of partners and legal and tax advice, and the arrangements available vary by insurer and jurisdiction. The common options are:

• Own-life policies: each partner insures their own life, with the proceeds directed to the other partners through assignment or a similar arrangement.
• Cross-ownership: each partner owns a policy on the others’ lives, which works neatly for two partners but becomes cumbersome as the number grows.
• Company-owned: the business holds the policies and buys back the shares, where its legal form and constitution allow it.

How do you value a share for buy-sell funding?

The agreement should name a valuation method, whether a formula linked to profits or net assets, a figure the partners sign off each year, or an independent valuation at the time of the event. The sum assured is then set to match. The classic failure is drift: a company that has doubled in value since the policies were taken out leaves the survivors short of what they have promised to pay. Reviewing the agreed value and the cover behind it every year, and whenever a partner joins or leaves, is a small discipline that prevents that gap.

What changes when ownership spans entities or countries?

Ownership in the region is rarely tidy. Partners may hold their shares through a free zone holding company that owns a mainland operating entity, or own a Dubai company alongside a related business in Beirut. Each layer affects who must buy what from whom, and the insurance has to follow the same path. Partners resident in different countries may also be subject to different inheritance and succession rules. That is precisely why the buy-sell agreement should be drafted by a lawyer familiar with the jurisdictions involved; the insurance is designed to fund that document, not to stand in for it.

Should serious illness be part of the arrangement?

Death is not the only way a partner leaves. Someone who suffers a serious illness may be unable to work for a long period yet still own a third of the company and expect a say in its decisions. Adding critical illness cover, with a matching option in the agreement, can let the business buy the share on agreed terms while giving the ill partner capital when they most need it. Whether that suits you depends on the partners’ ages, health and wishes, and the illness definitions vary by insurer.

A sensible first step is for the partners to agree, with their lawyer, what should happen to each share in principle. Our advisors can then join the conversation to propose funding that matches the agreement and compare insurers on your behalf, starting with a complimentary initial meeting.

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• Partnership insurance
• Keymen insurance

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