Business cover
Buy/sell insurance
Buy/sell insurance gives the continuing owners the funds to buy out a partner's share if an owner dies, is permanently disabled, or suffers a critical illness, so ownership passes cleanly and the departing owner's family is paid fair value.
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The funds to buy out a partner, ready before you need them.
If an owner dies or can no longer work, the surviving owners keep control and the departing owner's family is paid fair value, without a forced sale.
Also called business succession cover
It funds the transfer, so ownership passes cleanly
Buy/sell insurance is a life insurance arrangement that funds a buy/sell agreement between business co-owners in Australia. If an owner dies, becomes totally and permanently disabled, or suffers a specified critical illness, the policy can provide the funds for the remaining owners to purchase the departing owner's share at a pre-agreed valuation. It is commonly used in partnerships, companies, unit trusts, and joint ventures to prevent unwanted third-party ownership, protect the departing owner's family with a fair payout, and keep the surviving business running without disruption.
How it works
Five steps from agreement to a clean buy-out
Agree the terms
Owners and their advisers draft the buy/sell agreement: triggers, valuation, and the buy-out mechanism.
Take out cover
Life, and often TPD and trauma, policies are arranged on each owner, sized to their share of the business.
Pay premiums
Premiums are funded by the owners, the business entity, or a trust, depending on the structure chosen.
A trigger event
An owner dies, becomes totally and permanently disabled, or suffers a covered critical illness.
The buy-out
Proceeds fund the purchase of the departing share. The family is paid fair value; the remaining owners keep control.
Who it suits
Who buy/sell insurance is for
It is generally relevant for any Australian business with two or more owners who share equity, profit, or decision-making. It matters most when the business would be hard to sell quickly, where the co-owners' families could not run it, and where owners carry personally guaranteed debt. A sole trader with no co-owners does not need it.
Businesses with co-owners
- PartnershipsGeneral, limited or professional partnerships sharing equity.
- Company shareholdersPrivate companies with two or more director-shareholders.
- Unit trust holdersWhere multiple parties hold units in the trust.
- Joint venturesParticipants sharing ownership of an asset or enterprise.
- Hard-to-sell businessesMost relevant when a stake cannot be sold quickly.
Know the limits
What buy/sell insurance does not do
Understanding the limits matters as much as the benefits. The policy is a funding mechanism: it does not guarantee the business survives, does not replace the legal agreement, and does not cover voluntary exits like resignation or retirement. Premiums are generally not tax deductible, because the arrangement is usually for a capital purpose, so always seek specific tax advice.
What it will not do
- No survival guaranteeFunds the ownership transfer, not ongoing viability.
- No legal agreementIt funds a buy-out; the agreement must be drafted separately.
- Not every exitCovers death, TPD and trauma, not resignation or retirement.
- No auto-growthSum insured will not rise with business value on its own.
Ownership structures
Choosing who owns the policies
Who owns the policies has significant tax and administrative implications. There is no universally best structure: the right choice depends on your entity type, the number of owners, and your broader tax position. Each option treats capital gains tax, premium deductibility, and the proceeds differently.
Four ways to hold cover
- Self-ownedEach owner insures their own life; suits two owners.
- Cross-ownedEach owner insures the other; gets complex past two.
- Trust-ownedAn insurance trust holds and distributes per the deed.
- Entity-ownedThe business owns the policies; simple for companies.
Before you set up
What you need to decide
Before setting up an arrangement, you and your co-owners need to settle the entity type and number of owners, the valuation method, which trigger events to cover, the policy ownership structure, the current business valuation that sets each sum insured, and how premiums will be funded. A put and call option may also be appropriate.
What to settle first
- Entity and ownersYour structure and the number of current and future owners.
- Valuation methodAgreed value, formula, or independent valuation at claim.
- Trigger eventsDeath and TPD at minimum; trauma and terminal as options.
- Policy ownershipWhich structure holds the cover and who funds premiums.
- CGT positionParticularly for self-owned and cross-owned structures.
Risks and considerations
Where these arrangements go wrong
- Underinsurance. If the business outgrows the insured amount, the buy-out can fall short.
- Policy lapse. If premiums stop and a policy lapses, the whole arrangement fails.
- Mismatched agreements. If the policy terms do not match the agreement, disputes and shortfalls follow.
- Tax complexity. The interaction of proceeds, CGT and structures needs advice specific to you.
- Inadequate documentation. A buy/sell agreement must be drafted by a qualified lawyer.
Underinsurance is the main risk
If the business outgrows the insured amount, the buy-out can fall short. Review the sum insured against current valuation every year, and keep premiums paid so the policy does not lapse.
A partnership outlives a partner only if it is funded to. Money decides who keeps control.
In a client’s words
What working with us is like
The smooth, personalised support from the Safety Nest team made the entire process easy. They carefully considered our unique situation and ensured we had a plan that made us feel secure about protecting our family’s future. We now have full confidence that we’re prepared for whatever comes next.
Abe White
Director and Co-Founder, Bizcap
FAQs
Frequently asked questions
How much does buy/sell insurance cost in Australia?
The cost depends on the sum insured (based on your valuation and ownership share), the age and health of each owner, the cover included (life, TPD, trauma), and whether premiums are stepped or level. Premiums vary significantly between insurers and individual circumstances, so a broker can obtain and compare quotes from multiple insurers for your situation.
Is buy/sell insurance tax deductible?
Generally, no. Because the proceeds are used for a capital purpose, purchasing a business interest, premiums are typically not deductible under Australian tax law. The treatment varies with the ownership structure, and in some entity-owned structures a portion may be deductible. Always obtain specific tax advice for your situation.
What is a put and call option in buy/sell insurance?
A put and call option is a legal mechanism common in Australian buy/sell agreements. It gives the departing owner (or their estate) the right to "put" (sell) their share to the remaining owners, and gives the remaining owners the right to "call" (buy) the departing owner's share. It can offer CGT advantages compared with a mandatory purchase, depending on the structure. Legal advice is essential to set it up correctly.
How often should buy/sell insurance be reviewed?
At least annually, and whenever there is a significant change in business value, ownership, structure, or an owner's personal circumstances. Compare the sum insured against the current valuation at each review to avoid underinsurance.
What happens if we don't have buy/sell insurance?
The remaining owners may need to find alternative funds, through cash reserves, personal borrowing, or selling assets, to buy out the departing owner's share. If funds cannot be raised, the departing owner's family may become unwilling business partners, or the business may need to be sold or wound up.
Can buy/sell insurance be held in a self-managed super fund (SMSF)?
Generally it should not be. The sole purpose test requires fund assets to be maintained for the sole purpose of providing retirement benefits, and using SMSF-held insurance to fund a business buy-out may breach that requirement. Seek advice from a qualified SMSF specialist before considering this option.
Protect your business succession
Fund the buy-out before you ever need it
A no-obligation chat with a specialist who maps your ownership structure, sizes each owner's cover to their share, and fits it to your buy/sell agreement. No separate advice fee for our advice.