You’ve spent a lot of time, sweat, and at some point tears building your business to where it is today. Your business can continue to grow as long as your focus is on expansion and vision rather than worrying about what would happen to your hard work if something unfortunate befell you, a partner, or key employee.
Life and disability insurance plays a key role in preserving your business by protecting the legacy and hard work of partners and key employees.
Buy-sell agreements are traditionally backed by life insurance policies on each partner by each partner. For example, if a business has three partners with equal shares, then 6 equal life insurance policies will be required to fully find the buy-sell agreement if one partner should pass away. The remaining two partners can then use the proceeds from the policies they had on the deceased to fund the buy-sell agreement and continue the mission of the business. This avoids having to use personal funds to execute the buy-sell.
Disability policies should also be considered in the case that a partner becomes permanently disabled and can no longer continue to play a role in the business.
Key-employee insurance should also be considered by the owner(s) in the case of death or disability of a key employee(s). Many small and medium size businesses depend heavily on the efforts of a few important people. If an employee in that position were to pass away or become disabled the health of the business would be impacted negatively until a suitable replacement could be found. Life and disability policies taken out on those key employees by the owner(s) will provide funding for the business to offset the loses incurred, fund the search for a replacement, and assure creditors of the solvency of the business.
The net worth of those employees to the business will need to be analyzed so that the policy benefits can be calculated. The loss in profits, cost of replacement, and any debt coverage need to be considered when determining the amount of benefit that is needed.