How Much Does Partnership Protection Insurance Cost in Ireland?

When it comes to running a business partnership, planning for the unexpected is crucial. If one partner were to pass away, financial challenges could quickly follow, impacting both the business and the deceased partner’s family. 

Partnership protection insurance offers a solution, providing a financial safety net for such situations. But how much does Partnership Protection Insurance cost in Ireland? The price varies depending on factors like the partnership’s value and each partner’s share. 

In this guide, we’ll discuss the essentials of partnership protection insurance costs, explore its valuable benefits, and explain how this insurance can make a significant difference for both the business and loved ones involved.

1. Estimating the Cost of Partnership Insurance in Ireland
2. Consequences of Losing a Partner Without Insurance
3. Why take out Partnership Insurance?
4. How Partnership Protection Insurance Can Help?
5. Example Scenario: Partnership Insurance in Action
6. How to Setup Partnership Insurance
7. Key Benefits of Partnership Protection Insurance
8. Conclusions and Key Takeaways.
9. FAQ.

1. Estimating the Cost of Partnership Insurance in Ireland

The exact cost of partnership protection insurance depends on several factors, including:

• The Partnership’s Value: Larger partnership values will naturally result in higher insurance premiums.
• Number of Partners: A greater number of partners can make partner insurance more expensive as it has to cover more lives.
• Age and Health of Partners: As with any life insurance, the age and health status of each partner affect premium rates.

By consulting with a financial advisor like Greenway Financial Advisors, partnerships can get accurate estimates based on their unique structure and needs.

2. Consequences of Losing a Partner Without Insurance

The sudden loss of a partner can bring about serious financial and operational challenges for both the surviving partners and the deceased partner’s next of kin. Here’s how each party may be affected:

For the Surviving Partners

The death of a partner can create immediate financial obligations under the existing partnership agreement or the Partnership Act of 1890. The surviving partners may be required to make substantial payments to the deceased partner’s estate, including:

• The deceased partner’s share of undrawn profits from the current year
• Their portion of any fixed assets, like office buildings or equipment
• Balances in the deceased partner’s capital or loan account
• A payout for the deceased partner’s share of the business goodwill

To meet these obligations, surviving partners might need to raise substantial capital quickly. If they lack liquid assets, they may be forced to take on loans, leading to prolonged debt. Alternatively, the partners may need to pay a pension to the deceased’s dependents, creating a long-term financial burden for the business.

In extreme cases this can result, the Partnership may be dissolved, with the surviving Partner(s) now no longer being part of a previously active and productive business venture.

For the Deceased Partner’s Next of Kin

The next of kin also face financial challenges if the partnership lacks sufficient funds. Even if the surviving partners agree to pay the deceased partner’s estate over time (e.g., over 10 years), it still leaves the dependents in a vulnerable position. Furthermore, they can’t simply sell their inherited share of the partnership to a third party and must instead wait for payments from the surviving partners.

3. Why take out Partnership Insurance?

They may not be pleasant statistics to ponder, but the probability of at least one of the Partners in a firm dying could be much higher than you may think.

Source: CSO Table 17 on Irish Life 2015/17; all Partners assumed to be aged exactly 40 and males

4. How Partnership Protection Insurance Can Help?

Partnership protection insurance is designed to provide a safety net in these situations by giving the surviving partners access to liquid funds.

The surviving Partner(s) retain full control over the firm as they are in a position to immediately buy back a deceased Partner’s share if they so wish.

The next of kin have the certainty that they can immediately realise the value of the deceased’s share of the firm by way of a capital lump sum.

This way, the surviving partners can pay the deceased partner’s share to their estate without needing to borrow funds or sell business assets. Here’s a look at how it works:

1. Establishing a Partnership Legal Agreement

Partnerships typically involve a written agreement that lays out each partner’s rights and responsibilities. This agreement should be updated to include details about what will happen to each partner’s share in the event of their death. Ideally, this agreement would clarify the estate’s entitlement, including whether any payments need to be made immediately or can be spread over time.

2. Adding Life Assurance Policies

Once the partnership agreement is in place, partners can add life assurance policies to ensure there’s sufficient capital to cover payments in the event of a partner’s death. This is often handled in two ways:

• Life of Another Policy: Each partner takes out a policy on the lives of their co-partners. The insurance value is set to cover the deceased’s share of the partnership. While straightforward, this approach can become complicated if there are more than two or three partners.
• Own Life in Trust: Each partner takes out a policy on their own life, with the payout amount set to cover the value of their partnership share. The policy is placed in a trust, ensuring that the proceeds are paid to the surviving partners in the event of death. This setup is often more flexible, allowing for adjustments if a partner leaves the business or if the partnership structure changes.
• Self Insurance: With this method of Partnership Insurance, each Partner is required to effect Section 785 Life Cover (also known as Pension Term Assurance) on his or her own life. This is designed to provide for their own dependents on death. The benefit of the policy goes to the deceased partners estate and next of kin on death, in lieu of any payment from the surviving Partners. Each Partner would pay the premium on their own policy.

5. Example Scenario: Partnership Insurance in Action

To illustrate, let’s consider a hypothetical partnership valued at €1,000,000 with three partners:

• Joe holds 40% of the partnership, valued at €400,000
• Sarah holds another 40%, valued at €400,000
• Peter holds 20%, valued at €200,000

Option 1: Life of Another Policy

Each Partner in the firm insures each of their fellow Partners for the amount they would need to buy back the deceased Partner’s share of the business.

In this instance, there are a total of six policies required, with each Partner required to take out two policies insuring their fellow Partners.

Therefore, if Joe dies, Sarah and Peter will each collect €200,000 under their respective policies, giving them sufficient funds to buy back Mr Quinns share of the business from his estate. 

Joe’s estate receives the €400,000 value of his share of the firm.

Option 2: Own Life in Trust

As the name implies, each policy is arranged under trust for the benefit of the other Partners so that, on death, the proceeds are paid to the trustees of the policy.

The trustees then pay the proceeds to the surviving Partners who use them to buy back the deceased Partner’s share of the business.

So, under Own Life in Trust, each Partner insures their own life for the value of their share of the firm, with the policy being written under a Declaration of Trust for the benefit of the surviving Partners.

On the death of a Partner, the remaining Partners will receive a proportion of the Life Cover in place. This is then used to buy back the deceased Partner’s share of the business.

If Joe passes away, the life assurance policy pays out his share. Here’s how the proceeds are divided:

• Sarah receives €266,667, allowing him to buy part of Joe’s share.
• Peter receives €133,333, allowing him to buy the remaining part of Joe’s share.

Through this “Buy/Sell” arrangement, the business stays under the control of the surviving partners, while Joe’s estate receives fair compensation.

Option 3 – Self Insurance

With this method of Partnership Insurance, each Partner is required to effect Section 785 Life Cover (also known as Pension Term Assurance) on his or her own life.

This is designed to provide for their own dependents on death. 

In the example above, Joe and Sarah would insure themselves for €400,000. Peter would insure himself for €200,000.

The benefit of that policy goes to their estate and next of kin on death, in lieu of any payment from the surviving Partners. Each Partner would pay the premium on their own policy.

6. How to Setup Partnership Insurance

Step 1 – Deciding who should be insured

All Partners in the firm should be insured. Those Partners who opt out will not be able to benefit from any other Partner’s policy 

Step 2 – Deciding how much cover is needed

• Each Partner should be insured for at least the current estimated value of their share of the Partnership.
• Other payments that may need to be made by the surviving Partner(s) to the deceased’s next of kin should be included.
• Where the Partnership operates on the basis of the automatic accrual of goodwill, there are a number of options available.

Step 3 – Prepare an appropriate legal agreement

One of the most flexible ways of structuring Partnership Insurance is through a ‘Double Option Agreement’, otherwise known as a ‘Call & Put Option’.

Under a Double Option Agreement, in the event of a Partner’s death, the surviving Partners would acquire an option to buy the deceased’s share of the firm from his or her legal representatives.

This option, called a ‘Call Option’, can be exercised by the surviving Partners within a limited period (usually within three months) after the death of a Partner.

Exercise of the option by the surviving Partners requires the deceased’s legal representatives to sell their share of the Partnership back to the surviving Partners, usually on a valuation basis specified in the agreement.

Likewise, the deceased’s next of kin would also acquire an option to compel the surviving Partners to purchase the deceased’s share of the Partnership from them. This is called a ‘Put Option’ and is usually exercised within the same limited time period (usually within three months).

In this way, either the surviving Partners or the deceased’s next of kin can trigger the purchase or sale of the deceased’s share of the Partnership after death. This ensures that both parties are financially protected.

Step 4 – Arrange the necessary Life Cover on each Partner

Put policies in place on one of the three options listed above, life of another, own life in trust or self insured.

Step 5 – Check the Inheritance Tax treatments that will apply to the policy proceeds

Ensure you are aware of any and all Inheritance Tax implications, particularly  Own Life in Trust basis and self insured.

Step 6 – Set up the required Life Cover policies

At this final stage, applications for the relevant policies are submitted. In some cases, the individual to be insured may also be required to attend a medical examination.

Also, in certain circumstances, the company may be asked to complete a financial questionnaire in order to assist us in our examination of the amount of cover proposed.

7. Key Benefits of Partnership Protection Insurance

Here’s why partnership insurance is a wise investment:

• Ensures Continuity of Ownership: Surviving partners can acquire the deceased’s share without needing loans or selling assets, keeping control of the business.
• Financial Stability for the Deceased’s Family: Dependents are fairly compensated, securing their financial future.

Simplicity and Flexibility: With an Own Life in Trust policy, beneficiaries can be changed if a partner exits the business, ensuring the arrangement adapts to changes over time.

8. Conclusions and Key Takeaways

Partnership protection insurance can be crucial for business partnerships, ensuring smooth ownership transitions and financial security for loved ones. The cost depends on various factors, including the partnership’s value and the specific terms of coverage. Investing in this protection can save partnerships from potential financial stress after a partner’s loss. 

However, for expert guidance on choosing the right policy and calculating costs, consider consulting a professional. Greenway Financial Advisors can help you navigate the options, ensuring your partnership’s future is secure. Reach out today to explore the best partnership protection solutions personalised to your needs.

9. FAQ