When you go into business with other people, it’s important to stop and think about what might happen in the event that you or one of your partners passes away. It’s one thing to start and run a small business with a particular person that you know and trust, but it’s another matter entirely to find yourself owning and operating a business with one of your partner’s heirs in the event of his or her death. However, if one of your partners dies and you haven’t done proper succession planning (a legally binding agreement about what will happen with his or her stock shares), that’s exactly the situation you’ll face.
That’s why it’s so important to have solid, sound buy-sell agreements in place as soon as you take on a business partner. When you go into business, you’ll want to draft a legally binding document that specifies exactly what the partners can and cannot do with their stock. If the partners agree that stock should not be assigned to heirs, the agreement will stipulate that the corporation will buy back outstanding shares in the event of an owner’s death.
Of course, it’s important to have a guaranteed source of funding, so you won’t have any problem buying back your partner’s stock from the estate should the agreement need to be enacted. That’s why business partners and life insurance for business owners go hand in hand. It’s important to take out a key person insurance policy on each of your company’s partners. With proper life insurance in place, there will be no worries about how to enact the buy-sell agreement should the need arise.
When you go into business with partners, you and your co-investors are very dependent on each other — in terms of both finance and a shared workload. Whether your company is just starting or you’ve been in business for years, it’s important to make sound decisions about business partners and life insurance. When you take out key person life insurance policies on each partner, the company will receive a lump sum life insurance payment in the event that one of the covered individuals dies.
Typically, surviving partners use proceeds from key person insurance policies to purchase outstanding stock shares per the terms of the company’s buy-sell agreement, to hire someone to handle the day-to-day duties performed by the deceased partner, and to take care of other operating expenses. When thinking about whether or not you can afford key person life insurance, it’s important to stop and ask yourself, and your partners, if you can afford to go without this important protection.