A life insurance policy is a promise by an insurance company to pay the beneficiary a specific amount of money when the insured die in exchange for timely payment of premiums. Generally life insurance is something you would often take out to protect your family and your loved ones. Everyone talks about how life insurance protects your family. Did you know that you can use life insurance to protect your business?
Lets face it. All businesses need protections. In a partnership, if a business partner dies, the business itself could be in trouble. You will have to replace the work provided by the deceased partner and also the deceased partner’s valuable contribution has to be replaced if the business has to go on. You may be forced into business with your business partner’s spouse or heirs if your partner dies or becomes disabled. The same would happen in case of any business with more than one owner. One way to protect yourself and the business is by getting term life insurance on your business partners or co-owners. With term life insurance, you get coverage for a specified period with low premiums. Your business owns the insurance, pays the premium and is the beneficiary. The insured is your business partner or co-owner. If your partner or co-owner dies, a death benefit is paid to the business.
With the help of a buy sell agreement, you or the business can purchase a deceased partner or co-owner’s interest cleanly and equitably. Buy sell agreements state the terms by which surviving owners, or a business entity itself, can purchase a deceased owner’s interest cleanly and equitably. Such agreements preserve continuity of ownership and designate value in a predetermined, unemotional way. You can use life insurance to fund such a buy sell agreement in two ways: Cross purchase and Entity Purchase. In cross purchase, each partner buys life insurance on each of the other partners. Premiums are not deductible and the proceeds are not taxable. When a partner dies, the surviving partner(s) collects on the policy(ies) owned on the deceased partner and buys the deceased partner’s interest per the agreement. The surviving partners increase their ownership and the deceased partner’s heirs receive cash in exchange for their business interest. This method is more suited for partnership businesses. In an entity purchase the partnership and the partners enter into a buy sell agreement. The partnership buys a life insurance policy on each of the partners. When one partner dies, the partnership collects on the policy owned on the deceased and buys the deceased partner’s equity interest per the agreement. Thereafter, the surviving partners own an increased portion of the partnership entity and the deceased partner’s heirs receive cash from the sale of their equity interest. This is more suited for corporations.
It’s amazing just how many businesses completely overlook business protection insurance. Everything else is insured but for some reason some businesses just don’t see the sense in insuring the key people, the directors, business loans etc until it’s way too late. All it takes is one partner to die or suffer a critical illness and the business cold realistically cease trading if proper agreements aren’t in place.