Partnership Insurance
To justify the use of life insurance in business partnerships, we must understand why people form partnerships, what needs they are trying to cover, and how we can address them with insurance.
A partnership is basically an association of two or more people who co-own a business to make profits, and they associate for several reasons:
- To combine their capital
- Because they participate in the management of the business, contributing their knowledge and experience
- All share in the profits in the proportion established in the partnership agreement, benefiting their economic dependents and families.
The Mercantile Companies Act determines that if it has not been established in the Partnership Agreement what would happen when one of the Partners dies, the partnership must dissolve, as the relationship between the Partners is voluntary, it is a contractual business relationship in which each Partner acts on behalf of the others and can expose them to unlimited liability.
Industrial Partners, when the Capital Partner does not participate as a manager, are responsible for the entire business liability, even with their personal properties, while Capital Partners are only responsible for an amount equal to their contribution to the business.
In both cases, a cash reserve is required to address these eventualities. Insurance is a solution.
With or without an agreement, whether it was provided for in the Articles of Incorporation, there are two alternatives for surviving Partners:
- Liquidation of the Partnership
- Reorganization of the Partnership
- Buying the shares from the heirs
- Selling to the heirs
- Accepting the heirs into the business
- Accepting the buyer of the heirs' shares
For any of the above alternatives, cash is needed to make the solution as suitable as possible. This is where our advice will be directed to convince with arguments that insurance is the best alternative.
The type of insurance to recommend depends on the specific characteristics and desires of each partnership, as well as the individual interests of the Partners.
Based on the above, we could recommend the following insurances:
Joint Insurance: Partner A is the beneficiary of Partner B, and Partner B is the beneficiary of Partner A.
Cross Purchase Plan: Each partner insures themselves for the benefit of the remaining partners, distributing the Sum Assured in direct proportion to their share in the partnership.
– Group Insurance: When the partnership consists of 5 or more participants.
Company Insurance: This involves the company contracting, paying for, and benefiting from the insurance, with certain benefits for the partners and the company, but limited in terms of payment to the heirs of the deceased partner’s participation.
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