Cross Ownership of Insurance
Cross Ownership refers to the ownership of an insurance policy in respect of the Life Insured by all owners of the business other than the Life Insured. Cross Ownership also includes circumstances where the business itself may own a policy in respect of the Life Insured, for example where there is an agreement to apply the proceeds towards debt reduction or to fund the buyback of shares in the company.
Cross Ownership is sometimes preferred to ensure that the insurance proceeds are received by the continuing owners (‘purchasers‘) who can then control the application of those monies, which would usually include:
- the payment of the purchase price for the outgoing owner’s interest in the business; and
- if part of the Business Succession Plan, payment of monies to reduce debt of the business.
Whilst a CGT exemption is available for Death Benefits, Cross Ownership will result in a CGT liability in the case of Non-Death Benefits (such as Total and Permanent Disablement and/or Trauma Benefits) paid following a claim. As such, unless the amount insured for Non-Death Benefit cover is increased to anticipate the CGT liability, Cross Ownership will result in an avoidable CGT liability. As such, the preferred methods of ownership of all buy/sell insurance are Self Ownership or Trust Ownership.