life insurance: partnership insurance

1. PRESENTATION ON THE TOPIC
OF LIFE INSURANCE:
PARTNERSHIP INSURANCE
MOHD SHOAEB SHEIKH
PRIYAL SONI
LAXITA MEHRA

2. WHAT IS THE SIGNIFICANCE OF PARTNERSHIP
INSURANCE
• CONTINUOUS CO-OPERATION OF EACH PARTNER VERY IMPORTANT IN A PARTNERSHIP FIRM.
• IF A PARTNER DIES PREMATURELY THE PARTNERSHIP FIRM MAY BE REQUIRED TO BE DISSOLVED.
• THE DECEASED PARTNER’S LEGAL HEIRS MAY ASK FOR THEIR SHARE FROM SURVIVING PARTNERS.
• IN THAT CASE THE QUESTION ARISES AS TO HOW THE FIRM OR SURVIVING PARTNERS CAN
ARRANGE FOR PURCHASING THE STAKE FROM LEGAL HEIRS OF DECEASED PARTNER.
• PARTNERSHIP INSURANCE CAN HELP TO AVOID SUCH A SITUATION.

3. OVERVIEW ON PARTNERSHIP
• IN INDIA THE PARTNERSHIP FIRMS ARE GOVERNED BY THE INDIAN PARTNERSHIP ACT, 1932.
SECTION 4 OF THIS ACT DEFINES PARTNERSHIP “AS THE RELATIONSHIP BETWEEN PERSONS WHO
HAVE AGREED TO SHARE THE PROFITS OF A BUSINESS CARRIED ON BY ALL OR ANY OF THEM
ACTING FOR ALL”.
• THE LIABILITY OF THE PARTNERS IS UNLIMITED AND EVERY PARTNER IS LIABLE FOR ALL THE DEBTS
OF THE FIRM IN THE SAME MANNER AS HIS OTHER PERSONAL DEBTS.
• HOWEVER, THE LIABILITY OF A MINOR PARTNER IS RESTRICTED TO HIS OWN CONTRIBUTIONS.
• THE PROFITS OF THE PARTNERSHIP FIRM NEED NOT BE SHARED IN PROPORTION TO THE CAPITAL
CONTRIBUTED BY EACH PARTNER. THE PROFITS ARE SHARED IN, AGREED PROPORTIONS, AND IF
THERE IS NO AGREEMENT, THE PROFITS ARE SHARED EQUALLY.

4. HOW DOES IT WORK?
• ON DEATH OF ANY ONE OF THE PARTNERS, THE PARTNERSHIP FIRM IS AUTOMATICALLY DISSOLVED
UNLESS THERE IS PROVISION TO THE CONTRARY IN THE ARTICLES OF PARTNERSHIP. TO AVOID THIS
SITUATION GENERALLY A PROVISION IS MADE FOR CONTINUATION OF THE PARTNERSHIP EVEN
AFTER THE DEATH OF A PARTNER. VARIOUS ALTERNATIVES COULD BE CONSIDERED ON THE DEATH
OF A PARTNER WHICH ARE AS UNDER:
• FIRST ALTERNATIVE: THE SURVIVING PARTNER MAY PURCHASE THE INTEREST OF THE DECEASED
PARTNER. THE MAIN DIFFICULTY WILL BE TO RAISE IMMEDIATELY THE NECESSARY CASH TO PAY
FOR THE DECEASED PARTNER'S INTEREST. IF HE DOES NOT HAVE OTHER RESOURCES HE HAS EITHER
TO BORROW OR TO PAY THE PURCHASE PRICE OVER A PERIOD OF YEARS.

5. CONTI…..
• SECOND ALTERNATIVE: SURVIVING PARTNER MAY REORGANIZE THE BUSINESS WITH A NEW
PARTNER. THE NEW PARTNER WILL THEN BRING IN CAPITAL WHICH COULD BE UTILIZED FOR
PAYING OFF THE ESTATE OF THE DECEASED PARTNER. IT MAY BE DIFFICULT TO FIND A SUITABLE
PERSON FOR THIS PURPOSE.
• THIRD ALTERNATIVE: THE HEIR OF THE DECEASED PARTNER MAY BE TAKEN AS A PARTNER. THIS
MAY ALSO BE DIFFICULT BECAUSE THE HEIR OF THE DECEASED PARTNER MAY BE A MINOR AND
NOT IN A POSITION TO PARTICIPATE IN THE BUSINESS. IT MAY BE POSSIBLE TO ADMIT HIM ONLY
TO THE BENEFITS OF THE PARTNERSHIP.

6. DIFFICULTY WITH THE THIRD ALTERNATIVE
• IN VIEW OF THE DIFFICULTY THAT MAY ARISE ON THE DEATH OF A PARTNER GENERALLY THERE IS A
CLAUSE IN THE PARTNERSHIP AGREEMENT PROVIDING FOR PURCHASE OF THE SHARE OF THE
DECEASED PARTNER.
• IT IS OBVIOUS THAT ON THE DEATH OF A PARTNER CAPITAL IS REQUIRED FOR BUYING THE SHARE
OF THE DECEASED PARTNER. IF IT IS FINANCED FROM THE PARTNERSHIP FUNDS, IT WILL HAVE
SERIOUS EFFECT ON THE PROFIT EARNING CAPACITY OF THE BUSINESS. LIFE ASSURANCE ALONE
CAN THEREFORE MAKE FULL PROVISION FOR THIS CONTINGENCY

7. CONTI….
• A PARTNERSHIP FIRM HAS AN INSURABLE INTEREST IN THE LIFE OF EACH OF THE PARTNERS IF AN
AGREEMENT EXISTS BETWEEN THE PARTIES FOR THE SURVIVOR/S TO PURCHASE A DECEASED PARTNER'S
INTEREST IN THE BUSINESS.
• STRICTLY, THE EXTENT OF THE INSURABLE INTEREST ON THE LIFE OF ANY ONE OF THE PARTNERS
WOULD APPEAR TO BE THE AMOUNT OF THE PURCHASE MONEY THE SURVIVOR/S WOULD NEED FOR
THE PURCHASE OF THE INTEREST IF HIS DEATH WERE TO OCCUR IMMEDIATELY AFTER THE PARTNERSHIP
POLICY IS TAKEN OUT.
• A JOINT LIFE POLICY WILL PROVIDE VERY VALUABLE SAFEGUARDS TO PARTNERSHIP FIRMS AGAINST
DIFFICULTIES THAT ARE LIKELY TO ARISE ON DEATH OF ONE OF THE PARTNERS. THE POLICY WOULD BE
GENERALLY ISSUED IN WHOLE LIFE FORM ALTHOUGH ENDOWMENT ASSURANCE FORM CAN ALSO BE
USED IN EXCEPTIONAL CIRCUMSTANCES.

8. ELIGIBILITY CONDITIONS FOR PARTNERSHIP
INSURANCE
• ALL THE INSURABLE PARTNERS ARE REQUIRED TO BE INSURED.
• EACH PARTNER WILL BE INSURED SEPARATELY FOR THE AMOUNT EQUAL
• TO HIS/HER CAPITAL AMOUNT STANDING TO HIS/HER CREDIT AS PER LAST ASSESSMENT
YEAR.
• KEEPING IN VIEW THE GROWTH OF THE FIRM, INSURANCE AMOUNT OF EACH PARTNER
WILL BE INCREASED BY GIVING CREDIT FOR THE GOODWILL OF THE FIRM.
• CALCULATION OF GOODWILL:
• GOODWILL OF THE FIRM WILL BE EQUAL TO TOTAL NET PROFIT OF THE LAST
• THREE ASSESSMENT YEARS. THE ABOVE GOODWILL WILL BE PROPORTIONATELY ADDED TO THE CAPITAL
OF EACH PARTNER DEPENDING ON HIS SHARE OF PROFIT IN THE FIRM.

9. TAX BENEFITS
• PREMIUMS PAID BY THE PARTNERSHIP FIRM WILL BE ELIGIBLE TO QUALIFY AS BUSINESS EXPENSES UNDER
SEC.37 (1) OF THE INCOME TAX ACT.
• IF A POLICY IS TAKEN OUT ON THESE PREMISES, IT WILL BE NECESSARY TO TAKE THE FOLLOWING SAFEGUARDS
FOR THE PURPOSE OF OBTAINING RELIEF OF INCOME TAX :
• THE FIRM SHOULD BE THE PROPOSER AND BENEFICIARY.
• THE OBJECT OF INSURANCE VIZ. TO PROTECT AGAINST LOSS OF PROFIT ON THE WITHDRAWAL OF CAPITAL ON THE
DEMISE OF A PARTNER SHOULD BE BROUGHT OUT CLEARLY IN THE PROPOSAL FORM.
• THE SUM ASSURED SHOULD BEAR REASONABLE RELATIONSHIP WITH THE ANTICIPATED LOSS.
• THE POLICY SHOULD NOT BE ASSIGNED.
• PREMIUMS PAID BY THE PARTNERSHIP FIRM ARE NOT A PERQUISITE IN THE HANDS OF THE PARTNER.
• MATURITY/DEATH CLAIM AMOUNT RECEIVED BY THE COMPANY WILL BE ADDED TO THE BUSINESS INCOME OF
THE PARTNERSHIP FIRM IN THE YEAR OF RECEIPT.

10. REQUIREMENTS FOR PARTNERSHIP INSURANCE
• LETTER OF AUTHORITY IN FAVOUR OF PARTNER SIGNING THE PROPOSAL.
• COPY OF DEED OF PARTNERSHIP DULY ATTESTED BY THE PARTNER AUTHORIZED TO SIGN
INSURANCE PROPOSAL.
• COPIES OF AUDITED BALANCE SHEET & PROFIT & LOSS A/CS FOR LAST 3 YRS.
• COPIES OF ITRS OF THE FIRM FOR PRECEDING 3 YEARS DULY ATTESTED BY THE AUTHORIZED
PARTNER.
• THE COPY OF AUDITED BALANCE SHEET CONTAINING SCHEDULE OF PARTNER’S CAPITAL A/CS.
• THE POLICY HAS TO BE KEPT UNASSIGNED. A CLAUSE SHOULD BE PROVIDED IN THE PARTNERSHIP
DEED TO GO IN FOR INSURANCE ON THE LIVES OF THE PARTNERS. A SUPPLEMENTARY DEED IS
REQUIRED TO INCLUDE THE ABOVE CLAUSE.

11. WHAT IF PARTNERSHIP FIRM IS DISSOLVED BEFORE
DEATH OF PARTNERS?
• THE FIRM HAS THE FOLLOWING CHOICES:
• SURRENDER THE POLICY
• FIRM CAN ASSIGN THE POLICY TO THE PARTNERS, AS POLICY HAS NO SURRENDER VALUE.

12. THANK YOU