The essence of partnership firm comes from its partners of and their commitment towards running the business with mutual agreement or predetermined terms. The death of any partner may bring major repercussions like financial and legal hardship for the surviving partners, possibly jeopardizing the future of the business. In this scenario a partnership Insurance comes as a helping aid for the surviving partners in continuing the business and ensuring that the firm will have liquidity available to purchase the deceased partner’s share.
Who can buy Partnership Insurance?
This can be taken by members of a partnership firm of any kind. The firm should apply insurance for all partners simultaneously and the amount of cover depends on the firm’s net worth. The partnership agreement should have a clause that the partnership can be revoked definitely if a partner dies .The partnership Insurance cannot be given to a firm which is loss making in the preceding 3 years.
Types of partnership Insurance:
Cross purchase plan: This works out best for company with only 2 partners where one partner of the firm purchases life insurance for the other with themselves listed as beneficiary. If in case of an uneventful occurrences the payout is received by surviving partner which would be used for purchase of deceased partners’ interest/share in the company.
Entity plan: This works out best for a company with multiple partners. The insurance is bought by the firm as per the partnership agreement to the extent of shares held by the individual partners. In case of death of any of the partners the surviving partners will have the right to purchase the deceased partners share in the firm. The proceeds will be paid to firm which will be used for settlement of shares in-part or full to the legal heirs.
The amount of insurance cover in Partnership Insurance depends on the firm’s net worth. This is evaluated taking the below into consideration:
• Share of capital in between the partners.
• Share of profit among the partners.
• Partner’s share in the goodwill of the firm, at the time of death.
Points to consider for Partnership Insurance:
The difference between the ages of two partners (youngest & oldest) should not be large.
The policy should mature before the oldest partner gets to the age of 75 years.
On the event of death of a partner capital must be withdrawn.
Nomination is not allowed.
Absolute Assignment is allowed in favour of the Life Insured only.
Post absolute Assignment all the payouts will go to the Nominee/s of the assignee.
Benefits of Partnership Insurance: Financial Security: Gives surviving partners the funds to repay the deceased’s share.
Option for legal heirs: The deceased's successor is not obliged to become involved in the business.
Peace of Mind: Partners have the security of knowing that they can retain control of their business.
Tax Benefit: Premiums paid by the partnership firm under Partnership Insurance Policy can be claimed
as deduction under section 37(1) of the Income Tax Act, 1961