Life Insurance For Business Owners

Business owners have unique life insurance needs. The two most common concepts for business life insurance are buy sell life insurance and key person life insurance.

Buy-Sell life insurance

Buy-Sell life insurance coupled with a shareholder’s agreement, protects both the surviving business partner(s) and the family of the deceased partner. A business with multiple shareholders (sometimes excluding spouses) should have these in place.

Consider the following three scenarios on the death of a shareholder:

No buy-sell insurance and no shareholder’s agreement in place

The deceased`s family inherits their share of the business. This leaves the surviving business partner(s) with the family of the deceased as their new partner. This is not an ideal situation and often leads to either a fire sale or legal dispute.

Shareholder’s agreement in place but no buy sell life insurance

Surprisingly, often shareholder’s agreements are drafted but not funded. In this situation the surviving shareholder(s) are obligated to buy out the deceased’s family but may not have the funds to do so. The result if often liquidation of the business.

Buy-sell insurance and shareholder’s agreement in place

A buy-sell shareholder`s agreement (drafted by a lawyer) stipulates what is to happen on the death of a partner/shareholder. Usually the surviving shareholder(s) will buy out the deceased shareholder’s estate. A buy-sell life insurance policy then provides the surviving shareholder(s) with the funds to facilitate this transaction. The end-result is:

  • the deceased’s family is compensated for their share of the business value
  • the surviving shareholder(s) get ownership and control of the business
  • the business carries on

Key person insurance

Key person life insurance gives a business a cash injection on the death of a key person. The beneficiary of key man life insurance is the company itself. The death of an important team member causes financial stress and the death benefit is used to mitigate this. Key person life insurance is often written into shareholder’s agreements as well.

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