The Importance of Life Insurance for Business Partners

Business partners have many things to worry about while running a business. One of them is, what happens to the business if one of the partners dies.

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As a business owner, you understand that many of the daily operations rely on your presence. In the unfortunate circumstance of your absence, would your partner be able to manage the business, and would your spouse be capable of providing for your family?

A life insurance policy can provide financial security for your loved ones, business, partners, and employees in the event of your untimely passing. The same scenario can be true for your partner.

As an example, a 50 year old business owner - male and smoker - would pay around $260 per month for a 20 year term life insurance policy with a death benefit of $500,000. A 55 year old would pay, on average, around $420 per month for the same policy. See more life insurance costs here.

Small business often depend a lot on the founding partners, so, is one of them dies, it can be a huge blow to the business.

One way to mitigate some of the risk is to get life insurance for the business partners, providing financial security and peace of mind in the event of the unexpected.

There are a few options business partners can choose from -  we discuss them below.

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Life Insurance Options for Business Partners

There are a few different options when insuring business partners:

Individual Life Insurance

Individual life insurance can help protect small business partners in the event of a co-owner's death. With this type of insurance, each partner takes out a policy on the other's life. If one partner passes away, the insurance benefits are paid to the surviving partner. This money can help the remaining owner maintain business operations and avoid severe financial strain from the loss of their partner.

Some business partners choose to get two separate policies - one that names their co-owner as beneficiary, and another personal policy that names a spouse or family member. Having both types of coverage ensures that both business interests and personal dependents are financially looked after if tragedy occurs. With the right life insurance arrangements, small business partners can have peace of mind that their shared venture and loved ones will be protected if the unthinkable happens.

Example costs for a 20-year term policy for a business owner that smokes:

(Rates as off 10/27/2024 - these are just example costs - your rates will be different - the insurance underwriter sets the final rates)

Key Person Insurance

Key person or key man insurance is a form of life insurance where the business, rather than an individual, is named as the beneficiary. This type of policy provides funds to a company if a vital employee passes away unexpectedly. Research from LIMRA indicates that around 20% of small businesses pay for life insurance, either for the benefit of the company itself or the owner's family.

Purchasing a key person policy with yourself listed as the key employee can help replace lost income and give your business partner time to determine next steps for the company if you were to die prematurely. Likewise, taking out a key person policy on a partner protects you in the same way if they were to pass away unexpectedly. Key person insurance allows businesses to financially prepare for the loss of an essential employee.

Buy-sell Agreements

A buy-sell agreement provides a way for business partners to plan for what will happen if one of them dies. It is a legally binding contract that states the surviving partner can purchase the deceased partner's share of the business. To ensure the funds are available to buy out the deceased's share, the partners often take out life insurance policies on each other.

For example, if the buy-sell agreement specifies the survivor can purchase the other half of the business for $1 million, each partner might take out a $1 million policy that names the other partner as the beneficiary. Then if one partner dies, the survivor receives the $1 million insurance payout to buy the deceased partner's share from their estate. This allows the business to continue operating smoothly. The buy-sell agreement and life insurance policies provide a clear plan of action and funding source when a partner dies.

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Specific Types of Life Insurance

Knowing the different types of policies available, such as whole life insurance, term life insurance and permanent life insurance, can help ensure you make a sound decision that best fits your and your partner's needs.

Whole life insurance offers guaranteed premiums that remain stable for the lifetime of the policy. An accumulating cash value grows tax-advantaged at a predictable fixed interest rate, making it an appealing choice if you plan to stay in business together for many years and use the forced savings provided by these policies. Whole policies from mutual companies, like Guardian, may also pay dividends which can further increase growth potential.

Term life insurance offers coverage for a certain period — usually one year to thirty years — but unlike whole life coverage does not build cash value or have dividends associated with mutual companies. Because of this shorter timeline, term life insurance is often much more affordable than permanent policies. This makes it an appealing option when starting out or if there is a limited budget. One downside is that after the policy ends, you may not be able to buy another due to high premiums related to age or health issues.

Permanent life insurance (whole, universal or variable) also allows for building cash value while providing greater flexibility than other types of policies due to allowing payment variations within a specific range. Some of these policies even let you tie cash account growth to market investments for more upside growth potential - though this comes with exposure to market volatility and risk.

Permanent policies are designed to cover individuals throughout their lifetime - provided premiums continue to be paid - making them ideal if key person in the business is also an owner or partner who ultimately wants the accumulated cash value to function as a retirement benefit when they leave the business for any reason other than death.

Picking the right life insurance policy depends on how long coverage is needed and what budget restrictions there may be. Whole and permanent policies tend to offer more benefits in terms of added cash values and some flexibility but come at higher costs compared with term life policies which are more affordable but lack the longevity and savings associated with longer-term plans such as whole or permanent policies can provide.

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Benefits of Life Insurance for Business Partners

A life insurance policy purchased by a business owner can provide immense peace of mind for his or her partners, employees, and family. Not only does it protect the family of the deceased business owner from financial hardship, but it also transfers the responsibility of the business onto the successor in the event of the owner's death. As such, securing life insurance for business partners is an essential part of ensuring business continuity in times of need.

By having a life insurance policy as part of your business structure, you would be able to designate a beneficiary who would receive the death benefit upon your passing. This designation provides stability to those left behind and helps distribute profits evenly among family members if applicable. Furthermore, premium payments are taken on a regular basis with the same amount every month and are typically tax-deductible.

Buy-sell agreements are also an important tool when it comes to life insurance for business partners. They enable two or more parties to enter into a contractual agreement that designates how assets will be divvied up between them should one partner pass away due to illness or other causes. By entering into such an agreement, potential obstacles can be avoided during periods of transition.

Furthermore, key person life insurance can make a huge difference when it comes to keeping a business afloat after its owner's death. This type of policy helps to protect businesses from financial losses due to lost productivity, payments made in order to hire new personnel or recruit replacements for their original owner — all expenses that could potentially hinder a company's growth and prosperity in times of need.

The benefits of having life insurance in such circumstances don't stop there; should an estate have multiple heirs, they would all be able to receive equal portions through this means as opposed to competing over control over assets and assets value - something known as "equalizing an estate". In short, buying life insurance for business partners is a priceless resource that can help keep businesses going strong well after its original owners have passed away.

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Deciding on an Insurance Policy

When deciding which type of policy to get, it is crucial to weigh factors such as the flexibility of the policy, whether or not there are any pre-existing conditions, and the length of term if a term life insurance policy. The life insurance plan that works best for two business partners will depend on these factors.

Before choosing a plan speak to your partner about all options, and if you have any doubts or questions, speak with a life insurance professional who can provide you with guidance on which policy will give you and your partner the most comprehensive protection.

When selecting a life insurance policy for business partners, it is also important to consider how the coverage will be shared versus how much each partner will pay. Policies can be set up so that each partner pays equally into coverage or so that each partner has a predetermined amount of coverage based on their individual contributions.

Understanding how these payments work can help you determine which type of policy will meet both partners’ individual needs and still give them the coverage they are looking for in their life insurance plan.

Bottom Line

The topic of life insurance for business partners is an important one for entrepreneurs who rely on each other to run their companies. Taking out a life insurance policy on your business partner is a smart decision that ensures the business can continue to operate in case of an unexpected death. In addition, key person insurance is another type of life insurance that business owners can consider, which pays out a death benefit to the business if an insured employee passes away.

In terms of types of life insurance available, entrepreneurs have plenty of options to suit their needs. Whole life policies are typically more expensive than term policies, but they provide lifelong coverage as well as cash value and dividends. Term policies, on the other hand, are usually much cheaper but only provide coverage for a fixed period of time with no cash value or dividends associated with them.

The benefits of life insurance for business partners are numerous. It ensures that the surviving partner(s) will be able to purchase the deceased's share of the company, helping ensure your business remains in your hands. Furthermore, key person insurance helps businesses cover costs associated with the loss of a key employee such as lost revenue and recruitment expenses.

When it comes to comparing different types of life insurance policies, entrepreneurs should do their research to find one that is suitable for their budget and coverage needs. While there are many factors to consider when making this decision such as premium costs and coverage terms and conditions, it is important to make sure you agree to buy or sell with a contract that outlines the specifics of each partner's obligations.

Overall, life insurance for business partners and key employees can provide peace of mind and financial protection for entrepreneurs while ensuring that their companies can continue to thrive even after unexpected events occur.

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