Buy-Sell Insurance (Business Continuity)
What happens to your business if a partner or shareholder dies or becomes disabled?
Buy-sell insurance (often referred to as business continuity insurance) is used to fund buy-sell agreements, allowing surviving partners to purchase a deceased or disabled partner's share of the business. Without this insurance, families may inherit ownership stakes, creating conflict, forced sales, or business collapse. Buy-sell insurance ensures smooth ownership transitions, protects all parties, and preserves business value.
This type of business insurance provides business continuity protection for partnerships and companies with multiple shareholders.
DBI LTD, Financial Adviser (FSP 1007984), operating under AIA Thrive Limited (FSP 665291).
Key Facts
Funds Partnership Buyouts
Provides money to purchase deceased/disabled partner's share
Protects All Shareholders
Families get fair payout, business continues operating
Prevents Forced Sales
Avoids having to sell business or bring in unwanted partners
Avoids Unwanted Partners
Prevents shares passing to an owner's estate or family members not involved in the business
Covers Life, Trauma & TPD
Death, critical illness, or permanent disability triggers (where included in the policy structure)
What is a Buy-Sell Agreement?
A buy-sell agreement (also called a shareholder agreement or partnership agreement) is a legal contract between business owners that determines what happens to ownership shares if a partner dies, or where agreed, becomes permanently disabled or critically ill.
The problem without a buy-sell agreement:
When a business partner dies, their family typically inherits their share of the business. This creates massive problems:
- ✗Family members become unwanted business partners
- ✗Surviving partners lose control of decision-making
- ✗Family wants immediate cash, forcing business sale
- ✗Disputes over business valuation
- ✗Business operations disrupted
- ✗Employees and clients lose confidence
- ✗Company may face severe financial stress or collapse
The solution with a buy-sell agreement + insurance:
- ✓Agreement specifies buyout terms, valuation method, and process
- ✓Insurance provides immediate funds to purchase the deceased partner's share
- ✓Family receives fair cash payment
- ✓Surviving partners maintain 100% ownership
- ✓Business continues operating smoothly
- ✓All parties protected
How it works:
- 1.Partners create legal buy-sell agreement
- 2.Each partner is insured with Life and Total & Permanent Disability (TPD) cover, with Trauma included in some agreements where appropriate
- 3.Policies owned by business or partners (depending on structure)
- 4.If trigger event occurs (death/illness/disability), insurance pays out
- 5.Surviving partners use payout to buy deceased partner's share
- 6.Family receives cash, business ownership transfers smoothly
💡Without business continuity insurance funding, surviving partners may be forced to sell the entire business or take on debt to buy out the deceased partner's family, often destroying years of business building.
Why You Need Buy-Sell Insurance
If you're in a partnership or have multiple shareholders, a funded buy-sell agreement (business continuity protection) is essential business protection.
Scenario: Two 50/50 partners own a $2 million business. One partner dies suddenly.
Without Buy-Sell Insurance:
- ✗Deceased partner's spouse now owns 50%
- ✗Spouse wants immediate cash ($1M)
- ✗Surviving partner can't afford $1M buyout
- ✗Forced to take massive loan (if bank approves)
- ✗Or sell entire business to pay out family
- ✗Business operations disrupted for months
- ✗Clients and staff uncertainty
- ✗Company value drops due to instability
- ✗Surviving partner loses 20+ years of work
With Buy-Sell Insurance ($1M per partner):
- ✓Insurance pays $1 million to surviving partner
- ✓Surviving partner buys deceased partner's 50% share
- ✓Family receives $1 million cash payout immediately
- ✓No debt, no forced sale, no disruption
- ✓Business continues operating normally
- ✓Surviving partner owns 100% following execution of the buyout
- ✓Employees and clients assured
- ✓Everyone protected
- →Indicative premium cost: ~$100-200/month per partner (subject to age, health, and insurer)
The cost of buy-sell insurance is tiny compared to the catastrophic financial and emotional cost of not having it.
What Buy-Sell Insurance Covers
Buy-sell insurance is typically funded using the following types of cover:
Life Cover
Buyout if partner dies
Provides a lump sum to fund the purchase of a deceased partner's share.
What happens:
- •Partner dies
- •Life insurance pays out the agreed amount
- •Surviving partners use payout to buy deceased partner's share from family
- •Family receives cash
- •Ownership transfers smoothly
Typical cover amount: Typically equal to the partner's agreed share value at the time of review
Most common trigger: Death typically creates an immediate buyout obligation
Learn more about Life insurance.
Trauma Cover
Potential buyout if partner diagnosed with serious illness
Provides a lump sum if a partner is diagnosed with cancer, heart attack, stroke, or other covered critical illness.
Why this matters:
Trauma cover may allow an owner to exit the partnership where serious illness prevents continued involvement, subject to the terms of the buy-sell agreement.
Common conditions covered:
- •Cancer (all stages)
- •Heart attack
- •Stroke
- •Major organ transplant
- •Parkinson's disease
- •Multiple sclerosis
Partner options after diagnosis:
- •May trigger a buyout immediately, depending on the agreement terms
- •Take payout personally (for treatment/recovery)
- •Use funds for business transition where agreement allows
Typical cover amount: Typically equal to the partner's agreed share value if used
Key benefit: Allows dignified exit from partnership when health issues make continued involvement impossible.
Note: Trauma is not commonly used in buy-sell agreements, as many trauma events allow recovery and a return to work.
Learn more about Trauma cover.
TPD Cover
Buyout if partner becomes permanently unable to work
Provides a lump sum if a partner becomes totally and permanently disabled and unable to work in any suitable occupation.
Common causes:
- •Severe spinal injuries
- •Major brain injuries
- •Progressive neurological diseases
- •Severe mental health conditions
- •Conditions preventing any work capacity
Why businesses need this:
If a partner can never return to work, they need their capital to support their family. TPD cover funds the buyout so they receive their share's value without forcing the business into debt or sale.
Typical cover amount: Typically equal to the partner's agreed share value at the time of review
Key benefit: Protects disabled partner's financial future while allowing surviving partners to continue the business.
Learn more about TPD cover.
How Buy-Sell Agreements Work in New Zealand
A funded buy-sell agreement combines a legal contract with insurance policies to ensure smooth ownership transitions.
Step-by-step process:
Create legal agreement
Engage a lawyer to draft a buy-sell agreement specifying business valuation method, buyout process, triggering events, and payment terms
Determine business value
Establish current value and agree a valuation method for future buyouts (e.g. profit-based formula, independent valuation, or agreed amount)
Calculate insurance needed
Each partner's insurance should equal their ownership percentage value
Choose ownership structure
Cross-purchase (partners own policies on each other) or entity purchase (company owns policies on partners)
Apply for insurance
Each partner undergoes health underwriting for Life and TPD cover (with Trauma where included)
Maintain agreement
Review annually as business value changes, update insurance amounts accordingly
Trigger event occurs
A trigger event occurs (death or permanent disability, and in some cases critical illness if agreed)
Insurance pays out
Funds distributed in accordance with the agreement structure and policy terms
Buyout executed
Surviving partners purchase departing partner's share using insurance proceeds
Ownership transferred
Share ownership legally transferred, business continues
Example: $3 million business, 3 equal partners
- •Each partner needs $1 million cover
- •Covers their 33.33% share
Tax considerations:
- •Premium deductibility depends on the ownership structure and purpose of the cover
- •Insurance proceeds may be tax-free or taxable depending on structure and use
- •Share transfers may have tax or accounting implications
- •Always confirm with your accountant and lawyer before implementation
Key principle:
The insurance must equal the share value and be reviewed regularly. Under-insurance means surviving partners still need to find additional funds.
Two Ways to Structure Buy-Sell Insurance
The right structure depends on the number of owners, legal entity, tax considerations, and long-term succession plans.
There are two main structures for buy-sell insurance in New Zealand. Each has different tax implications and practical considerations.
Cross-Purchase Agreement
Partners own policies on each other
Example: 3 equal partners in $3M business
- •Partner A owns policies on Partners B & C ($500k each)
- •Partner B owns policies on Partners A & C ($500k each)
- •Partner C owns policies on Partners A & B ($500k each)
- →Total: 6 policies
How it works:
- 1.Partner A dies
- 2.Partners B & C each receive $500k payout (they own policies on A)
- 3.B & C use their $500k each to buy A's $1M share
- 4.A's family receives $1M
- 5.B & C now own 50/50
✓ Advantages:
- ✓Surviving partners may receive tax-free payouts, depending on structure
- ✓No capital gains tax on insurance proceeds
- ✓Clean ownership transfer
- ✓Cost base stepped up for future sale
⚠ Disadvantages:
- ✗More policies required (n × (n-1), where n = number of partners)
- ✗Premium costs shared differently if partners different ages/health
- ✗More complex to administer
- ✗Premiums are generally not tax-deductible
Best for:
- •2-3 partners
- •Similar age/health profiles
- •Tax efficiency priority
- •Partnerships, not companies
Entity Purchase Agreement
Company owns policies on all partners
Example: 3 equal partners in $3M business
- •Company owns policy on Partner A ($1M)
- •Company owns policy on Partner B ($1M)
- •Company owns policy on Partner C ($1M)
- →Total: 3 policies (one per partner)
How it works:
- 1.Partner A dies
- 2.Company receives $1M payout
- 3.Company uses $1M to buy A's share from family
- 4.Company cancels shares
- 5.B & C now own 50/50 through share dilution
✓ Advantages:
- ✓Simpler structure (one policy per partner)
- ✓Easier administration
- ✓Premiums potentially tax-deductible
- ✓Equal premium sharing regardless of individual age/health
- ✓Better for 4+ shareholders
⚠ Disadvantages:
- ✗Potential tax complications depending on how proceeds are applied
- ✗May require shareholder resolution for payouts
- ✗May be less tax-efficient than cross-purchase in some scenarios
- ✗Accounting complexity
Best for:
- •Companies (not partnerships)
- •4+ shareholders
- •Simplicity priority
- •Corporate structure
Which structure should you choose?
| Factor | Cross-Purchase | Entity Purchase |
|---|---|---|
| Number of policies | Many (n × (n-1)) | Few (1 per partner) |
| Best for | 2-3 partners | 4+ shareholders |
| Premium tax treatment | Not deductible (usually) | May be deductible |
| Payout tax treatment | Generally tax-free | Depends on structure |
| Administration | Complex | Simple |
| Best structure type | Partnerships, LLPs | Companies |
Work with your lawyer and accountant to determine the optimal structure for your business. Tax treatment varies significantly based on structure.
Most businesses benefit from professional advice to ensure the structure aligns with their legal agreement, tax position, and insurer requirements.
Get Expert AdviceReal Scenario: Law Firm Partnership
A law firm with 3 equal partners. Business valued at $6 million ($2M per partner). Partners are aged 45, 48, and 52.
One 48-year-old partner dies suddenly from heart attack.
Without Buy-Sell Insurance:
- ✗Partner's spouse inherits $2M share (33% ownership)
- ✗Spouse wants immediate $2M cash payout
- ✗Remaining partners can't afford $2M
- ✗Forced to sell firm or take massive loans
- ✗6 months of disruption, client uncertainty
- ✗Firm value drops to $4.5M due to instability
- ✗Eventually sell firm at loss
- ✗All three families financially damaged
With Buy-Sell Insurance ($2M cross-purchase structure):
- ✓Each partner owns $1M policy on each other partner (per agreement structure)
- ✓Two surviving partners each receive $1M payout
- ✓They use $2M combined to buy deceased partner's share
- ✓Deceased partner's family receives $2M cash, typically within several weeks, subject to claim assessment
- ✓No debt, no forced sale, no disruption
- ✓Remaining partners each now own 50% of the business
- ✓Firm continues serving clients normally
- ✓All parties protected
Premium Cost:
- •Age 45 partner: ~$110/month
- •Age 48 partner: ~$150/month
- •Age 52 partner: ~$230/month
- →Total: ~$490/month for $6M protection
- →Each partner pays $163/month average
Indicative premiums only. Actual costs depend on age, health, insurer, and structure.
Cost: $490/month to protect a $6 million business = 0.10% of business value per year
Result: Smoothest possible transition, all families protected, business preserved.
Every partnership is different. The right structure, cover amounts, and ownership setup should reflect your business, not a generic template.
Who Needs Buy-Sell Insurance?
Any business partnership
If you share ownership 50/50, 60/40, or any split, buy-sell insurance ensures smooth ownership transitions without forcing business sales.
Professional practices
Law firms, accounting practices, medical clinics, dental practices, any professional partnership where partners share ownership and revenue.
Family businesses
Siblings or family members in business together. Buy-sell insurance prevents family disputes and ensures fair compensation for all parties.
Tech start-ups with co-founders
Multiple founders building a tech company. Protects equity stakes and ensures smooth transitions if a founder exits due to death or disability.
Shareholders in private companies
Any business with 2+ shareholders where shares have significant value and ownership continuity matters.
Businesses planning for succession
Companies with formal succession plans that need funding mechanisms for smooth ownership transitions across generations or to new partners.
Frequently Asked Questions
Common questions about Buy-Sell Agreements and Business Life Insurance in New Zealand.
What is a buy sell agreement?
Why is buy sell insurance important?
Do I need a lawyer for a buy sell agreement?
Who owns the insurance policies in a buy sell arrangement?
What happens if the business grows in value over time?
What if one owner is much older or has health issues?
Does buy sell insurance cover retirement or voluntary exits?
How long does a buy sell insurance claim take?
Have more questions?
Let's talkProtect Your Partnership with Buy-Sell Insurance
Get a free quote and ensure your business partnership is protected. We'll help you structure the agreement, coordinate with your lawyer and accountant, and secure the right insurance cover.