What is Key Person Insurance or Buy/Sell Insurance?

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What is Key Person Insurance or Buy/Sell Insurance?

Key Person Insurance or Buy/Sell Insurance (or in the case of a Partnership Agreement, Partnership Buyout Insurance) provides the funds needed for the remaining owners of a business/trust to:

✅ Takeover or purchase the exiting owners share; and/or

✅ Have access to the required funds to replace the Key Person or recover from the loss of the Key Person from the business …

In the event of their death, total and permanent disability, or severe illness/trauma such as heart attack, stroke, cancer and/or paraplegia.

This type of insurance cover helps the business continue running with minimal disruption.

For the departing person or their estate, this insurance assists them to receive the agreed (normally market value) of their shareholding in return for transferring their business share to the remaining owners of the business/trust, or terminating their Employment / Independent Contractor Agreement.

Best Practice in a Shareholders' or Unitholders' Agreement

The Best practice within a Shareholders' or Unitholders' Agreement is to include terms that ensure life, permanent disability + trauma insurance is taken out in relation to all of the Securityholders.

The company or unit trust pays the annual insurance premiums.

Then, if a Securityholder is required to offer its securities for sale to the remaining Securityholders as a result of death, permanent disability + trauma sufficient to be covered by the insurance policy, the proceeds of the insurance policy are used to assist the remaining Securityholders in buying those securities.

The directors or trustee/s determine the amounts for the insurance policy from time to time, with the consent of Key (that is the majority or controlling) Securityholders.

Death or Incapacity of a Securityholder

In our Shareholders' or Unitholders' Agreement, by default, the death or incapacity of a Securityholder will not trigger a right for the other parties to buy out that Securityholder.

If you choose to add our Best Practice Buy/Sell Insurance provisions to the  Shareholders' or Unitholders' Agreement, then death/incapacity will be added as a trigger event requiring the affected party to offer its securities for sale to the remaining Securityholders.

Professional Tax/Accounting/Legal Advice is always Recommended

The potential for future ownership changes, and triggered tax implications {including income tax, capital gains tax, and fringe benefits tax) should be considered before final arrangements are made.

Credits:

This FAQ was created by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠.

Important Notice:

This FAQ is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.