Self-ownership is the simplest and most flexible option. If a claim is paid, the departing owner receives the insurance proceeds and the buy/sell agreement transfers their share of the business to the remaining owner(s).
Each individual maintains control of their own policy. The policy is fully portable so can continue after retirement from the business but the owner is also responsible for paying the premiums on their own policy. The premiums are not tax deductible and the proceeds are received tax free (if paid and owned by the insured).
The owner can also nominate who receives the insurance proceeds if a claim is triggered. If you have a spouse, you could nominate your spouse as beneficiary so they receive the payment directly. Tax implications will apply if the insurance proceeds are received by a related party, such as a family trust or company.
It is possible to pay these premiums via the business. Fringe Benefits Tax will apply if premiums are paid by the business, so you should seek tax advice from your accountant.
Under cross-ownership, each business owner will own (or jointly own) a policy on each of the other owners. If a claim is paid, the policy owners will receive the insurance proceeds to buy out the departing owner’s share of the business.
Under this option, the policy is controlled by people other than the insured individual. The insurance cover on the life insured can be cancelled if not required by the business. The premiums are not tax deductible and the proceeds will be taxable if there is a claim for disability or ownership is via a company. Tax is also payable if there is a change to the ownership of the insurance policy, this generally occurs when there is a change in business ownership, such as partnership details.
An agreement will be needed on how premiums are to be funded to ensure the policies stay current.