Sanlam : Watch Out for The Devil in The Detail

This scenario is a real threat that arises if a buy-and-sell arrangement does not fully address how to deal with a split between business partners, and can cause hostility between you and your partner in future, says Sanlam Legal Adviser David Thomson.

Thomson says while some business owners realise the importance of taking out a life policy as part of their buy-and-sell arrangement, they fail to put their agreement to writing and to deal with a parting of the ways.

'Business partners often have risk cover in place, but there is no clear distinction on whether it's business or personal cover. Sometimes the policy is actually not structured to enable the execution of a buy-and-sell arrangement. There may even be a life policy in place, but no buy-and-sell agreement or the agreement doesn't address what will happen to the policy if the partners split. Business owners should note that an insurance policy contracts are only half of the deal; there should be a 'buy and sell' agreement signed by the parties as well,' says Thomson.

Thomson explains that the question of 'insurable interest' is only relevant at the time of implementing the cover. This means that neither of the business partners can cancel the policy on their life by simply arguing that they are no longer business partners. The cancellation of the policy or a decision to hand it over to the other partner is entirely the choice of the individual who owns the policy, unless the buy-and-sell agreement provides otherwise.

Thomson warns business owners to ensure that their buy-and-sell agreements provide for a business split or termination. They should, ideally, include a clause that will ensure the policies will be ceded to the lives insured.