Publications and Documents:

Publications and Documents


Adviser Tips:

Adviser Tips


Adviser Updates:

Adviser Updates


Individual Updates (Most Recent First):

Adverse ATO Advice on Super Buy/Sell Cover

Partnership and Trust Loan Accounts

Effect of Debt Reduction Cover on Buy/Sell Cover

Prioritising Needs

Simultaneous Deaths

Mutual Will Strategies

Joe Hockey on Trusts

Tax Treatment of Self-Ownership Agreements

Vested and Indefeasible Interest

Gross or Net Value?

Henry Report

Deemed Dividends

Super Buy/Sell Cover

Bamford in the High Court

Trauma Cover in Super

Origins of Self-Ownership


Methods of Aggregation

Valuing the Business

Duty to Give Tax Advice

Equity vs Loan Capital

Horses for Courses

Commercial Debt Forgiveness

Choice of Trustee

Simplifying the Valuation Issue

Hybrid Succession Strategy

Hedge and Wedge Strategy

Sole Proprietors and Families

Free Teleconference

Simple or Complete Succession?

Contemporaneous Agreement

Geared Premium Funding

Super Fund Ownership

Business Family Will








Prioritising Needs


Sometimes your Needs exceed the amount of Insurance Cover that you can obtain.

This might make it necessary to insure some Needs rather than others or to reduce the amount of Cover allocated to a particular Need (or Needs).

This guide suggests how you might approach the relative priorities of your Needs.


When Might Your Needs Exceed the Available Cover?

Your Needs might exceed the available Cover in two situations:

  • the Premium Cost of the Cover exceeds the budget you are prepared to devote to funding your Succession Plan; or

  • the Cover you need exceeds the amount of Cover that is available for a particular Insured Event in Australia.


Buy/Sell Cover versus Debt Reduction Cover

The most common situation is where there is insufficient Cover to:

  • fund the Purchase Price of the Outgoing Proprietor's Equity; and

  • repay enough of the Business Debt to enable the Bank or Creditor to release the Outgoing Proprietor's Personal Guarantees and other Securities.

Should you fund the whole of the Purchase Price, but take the risk that the Bank will not release the Personal Guarantee and Securities?

Alternatively, should you prioritise releasing the Securities and insure less of the Purchase Price?

Prioritise the Purchase Price?

If you prioritise the Purchase Price, you will complete the transaction between the Vendor and the Purchaser.

However, this will result in the Vendor having a greater cash reserve, if the Bank decides to enforce its rights under the Guarantee and Securities.

It actually makes the Vendor a bigger target in the enforcment proceedings.

Prioritise the Debt Reduction Cover?

If you prioritise the reduction of the Business Debt, then you will hopefully obtain a release of the Guarantee and other Securities.

This will sever the link between the Vendor and the Bank.

However, it will create a shortfall in the Purchase Price.

The Purchasers will still have to fund the whole of the Purchase Price payable under the Agreement.

Their options with respect to the shortfall will be similar to the situation where they did not have any Insurance Cover.

The shortfall might have to be funded by way of:

  • personal resources;

  • Bank Loan; or

  • Vendor Finance.

It is common for Business Succession Plans to contain Vendor Finance Arrangements for the payment of any shortfall.


Most Businesses tend to prioritise the Debt Reduction Cover.


Buy/Sell Cover versus Personal Cover

The Outgoing Proprietor (and/or their Related Parties) will usually receive the aggregate of the Purchase Price and the Personal Cover.

You could argue that, as long as the total is appropriate, it doesn't matter to the Outgoing Proprietor.

However, it is more complex than that, and you need to take into account the interests of the Purchasers as well.

Prioritise the Purchase Price?

If you prioritise the Purchase Price, you will complete the transaction between the Vendor and the Purchaser.

The Purchaser will be under no further obligation to the Vendor.

However, this will leave a shortfall in the amount of Personal Cover.

In the absence of sufficient Personal Cover, there will be no other method of funding the shortfall or the Outgoing Proprietor's Needs.

Prioritise the Personal Cover?

The Personal Cover is normally intended to meet the balance of the Outgoing Proprietor's Needs after taking into account the Purchase Price that they will receive.

If you prioritise the Personal Needs, there will still be a shortfall in the total as a result of the shortfall in the Purchase Price.

However, in the absence of sufficient Buy/Sell Cover, the Purchasers will still have to fund the whole of the Purchase Price payable under the Agreement.

Again, this could be achieved by way of:

  • personal resources;

  • Bank Loan; or

  • Vendor Finance.

The important thing is that the Outgoing Proprietor will receive:

  • the Personal Cover;

  • the Insured Purchase Price; and

  • the balance of the Purchase Price.

As a result, this option maximises the amount receivable by the Outgoing Proprietor and their Family.


To the extent that the Outgoing Proprietor's Family might be the neediest of the parties, most Businesses tend to prioritise the Personal Cover.

However, this issue needs to be carefully considered in each case.

In particular, you should take into account who will be paying the Premiums.

The Life Insured would normally pay the Premium with respect to the Personal Cover.

The Premium with respect to the Buy/Sell Cover would normally be shared proportionately between the Proprietors.

If the Business is the only party prepared to bear the Premium Cost, it would be entitled to prioritise the Purchase Price.


Copyright: Ian Gray Solicitor



Adviser Tip

The One Page Strategy is designed to help you simplify Succession Planning.

It helps you understand your needs, it helps you quantify them, it helps you cost them, and it helps you prioritise them.

See more Adviser Tips


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