An important part in the financial planning process for many legal partnerships is the provision of partnership protection.

This can be put in place to protect the partnership in the event of death of one of the partners, but can also be used to protect the business in the event of serious illness or some other form of incapacity.In the event of one of the partners dying, a life assurance policy can be used to protect the partnership by paying a lump sum to the practice to enable them to purchase the business share passed on to the estate by the deceased.

Unless previously agreed to the contrary, the death will dissolve the partnership and is therefore likely to upset profits.

Additionally, the executors of the estate may decide to take an interest in the running of the partnership business, which is not usually desirable.A partnership protection agreement which has been properly drafted can therefore provide a simple solution to what could potentially become a complicated financial and emotional situation.The most common answer to the partnership protection problem is the implementation of term assurance policies.

Although there is no surrender value to such policies, the cost when compared to, say, flexible whole of life policies, is favourable.

However, such policies are restricted to life cover only, and cannot be used to purchase a retiring partner's share in the same way that, for example, endowment policies can.There are a number of methods to protect partners in the event of death.

The first, and most preferable, is for each partner to effect a policy on his or her own life, to retirement age, in trust for the benefit of the other partners - the sum assured being equivalent to each share.

The partners also enter into a 'cross option' agreement whereby the surviving partners have the option to purchase the deceased partner's share from his or her estate.

Equally, the agreement grants the deceased partner's estate an option to sell the share to the partnership and, if either party decides to exercise the option within an agreed time limit, all parties are bound.The advantage of the cross option method is that the deceased partner's share will qualify for business property relief for inheritance tax purposes when passed on to someone other than a spouse.

In other forms of partnership protection, such as those involving a binding contract to purchase or sell a business share, business property relief will be lost.

Additionally, a lump sum payment can be made available within weeks of death, and this can be of great benefit to all concerned.One problem which could cause inequity in the premiums for term assurance policies is the difference in age and health of each partner.

For example, a senior partner may be asked to pay a high premium covering his or her larger share in the partnership, even though the potential benefit will not be payable to him or her, but instead to the surviving partners.One simple solution would be to adjust the profit sha res in the business to reflect the individual premiums paid.

Alternatively, the premiums could be funded by the partnership itself and charged to the relevant partners' capital accounts.Any new partners joining the practice can easily be included in this type of arrangement if the other partners are not individually named in the trust documentation.

A new partner simply effects a similar term assurance policy on his or her own life in trust for the others, reflecting his or her new share.A second method of protection could involve each partner effecting a term assurance policy on a 'life of another' basis for each of the other partners.

However, there are significant disadvantages in adopting this route and therefore it may not be advisable.

For example, younger partners would have to pay higher premiums on the lives of senior partners and, unless the partnership is small, the number of policies required can become high and the administration disproportionate to the benefits achieved.For many partners, the ability to use a proportion of their pension contributions to provide life assurance cover will be an attractive alternative to a separate term assurance policy.

S.637 pension term assurance contracts, which replaced the old s.226a contracts, provide the added benefit of tax relief to the individual.Only a small proportion of those who contribute to personal pensions pay the maximum contributions, so providing life cover in this way may seem viable, even though premiums take up part of the annual pension contributions allowance.Up to 5% of the relevant earnings limit can be attributed to an s.637 life assurance contract, although it is imperative that those who have held different types of pension contracts over a number of years ensure that they do not become trapped by the new earnings cap rules for personal pensions.Tax relief on premiums can be claimed at the highest marginal income tax rate or, alternatively, employers who fund premiums within the 5% limit can claim tax relief against corporation tax - or against income tax if the business is unincorporated.The cost should be checked at the outset since it may not always be cheaper to fund premiums through s.637 policies.

For a larger partnership it may also prove impracticable to provide protection unless cover is written under one main scheme.A further thought must be given to protection in the event of other incapacities.

It may be possible to obtain cover in the form of a non-taxable lump sum should a partner suffer an unexpected critical illness.

Similarly, permanent health insurance (PHI) may be considered to cover both the partnership and the individual in the event of incapacity.In conclusion, although the premiums for PHI and critical illness policies may not qualify for tax relief, this form of protection should not be disregarded in favour of life cover alone.

However, the circumstances and priorities for each partnership will be different, and each practice must therefore implement whichever scheme is appropriate to its needs.