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What You Need to Know About Life Insurance for Business Partners


There are a number of different risks associated with going into business with a partner. One of these risks is that either yourself, or your partner, will pass away. Investing in life insurance for business partners is essential if you want your business to survive a partner's untimely death or disability. While business partner life insurance is a term life contract, it may different from the traditional contract. It is important to understand how business partner life insurance works, how it may differ from a traditional plan, and how you can go about getting insurance so you can ensure a safety net for your business.

How Does Business Partner Life Insurance Work?

In many ways, life insurance for business partners is very similar to the life insurance you would take out to protect your family if you were to pass away. The policy is technically a promise by the insurer to pay the beneficiary listed on the contract a specific amount of money if the insured party were to die. In exchange for this promise, the insured person or the business listed on the agreement must pay monthly or annual premiums. If you choose to protect your business with a life insurance plan, the beneficiary of the benefits would be the business partner that survives. While life insurance is a great thing to protect your family, it is also a great tool to use to protect your business in the event that one of the partners passes away.

What You Can Do With Life Insurance for Business Partners?

As you know, both you and your partner contribute a lot to your business. You may handle one aspect of the business while you partner handles another aspect. If your partner passes away, the surviving partner will need to replace the partner so that the business can go on. You may enjoy casually talking to your deceased partner's spouse, but have you imagined what it would be like to be forced into business with their spouse when they are gone? If you do not have insurance on the co-owner or partner, you may be required to work with the widow, widower, or the heirs of your partner. This can cause problems and eventually lead to the collapse of your business.

When both you and your partner carry life insurance, you never have to worry about this happening. When either one of the partners passes away, the death benefit is paid to the business and you can buy the deceased partner's interest in the business. All enterprises should have a buy sell agreement in place when they are incorporated. If you have a buy sell agreement in place, you can use the death benefit you receive to purchase the deceased partner's interest in the business cleanly and equitably. In the agreement, the terms by which surviving partners can purchase the deceased partner's interest in the business are laid out. The value of the buyout is predetermined and outlined in the agreement so emotions are not involved when the time comes.

How Can Life Insurance Be Used to Fund a Buy Sell Agreement?

When you have life insurance, the benefit can be used to fund the buy sell agreement in one of two ways. You can either use the cross purchase approach or the entity purchase approach. With the cross purchase approach, each partner in the business will buy term life insurance on the other partner with the same term duration and the same death benefit. Partner A will have a million dollar life insurance policy on Partner B and Partner B will have a million dollar policy on partner A. When you choose this approach, the premiums that you pay are not deductible. If a partner dies, the living partner would use the benefit to pay the heirs of the deceased for interest in the company. This is the most popular way to fund a buy sell agreement for partnerships.

The entity purchase approach is a bit different. With this approach, the partnership will buy a life insurance policy on each of the partners in the company. If a partner passes away, the partnership will collect the benefit and buy the interest per the buy sell agreement. While this sounds similar, this process is designed for corporations rather than just partnerships. Without a buy-sell agreement in place and a planned funding approach, you may be forced to dissolve your business when a partner dies.

Life insurance contracts for business partners are very similar to contracts for the average person. The only thing that differs is the owner of the policy and the beneficiary receiving the benefit. While life insurance is important, you need to price the cost of insurance so you can keep your overhead costs as low as possible. Make sure to compare side-by-side quotes, determine how much insurance is necessary, and protect your business from the unexpected. After all, if you lose a partner, the last thing you want to do is lose your business as well.