From Gregory Boop,
Your Guide to Business Insurance.
FREE Newsletter. Sign Up Now!

If your business is a small business or partnership, then you can secure its future past the death of a key employee, partner, or co-owner with life insurance and an effective buy-sell agreement.

When a partner dies, their ownership interest passes to the estate of the partner. The estate will stand in the shoes of the decedent. The estate will be entitled to have a valuation of the ownership interest and may – depending on the initial business set-up – demand payment for their percentage of the business.

As any small or family business person knows, the business, while rich in assets and equipment on paper, rarely has the cash flow or credit necessary to absorb the sudden purchase of a large percentage of the business. Further, the estate participating in the business can have other deleterious effects:

• If the business is the practice of a profession, the heirs or estate may not practice that profession. For example, a dentist’s office inherited by a non-dentist.
  
  
• Heirs working at the business may suddenly be promoted to “ownership” with little experience or training. For example, your partner built a hotel chain with you and dies suddenly and you become partners with his nineteen year-old grand-daughter with a penchant for drinking and driving.
  
  
• The estate could demand “better” uses of property or equipment. For example, demanding the family farm is sold to developers.
  
  

To protect against this, the original partnership agreement or an ancillary agreement, properly adopted (see an attorney in your state to accomplish this), can be created where the business agrees to “buy” the share of the owner and the owner agrees to “sell” the share for a set price. The agreement could be made as an immediate option upon death of the owner.

Insurance is used to match the set price in the “buy-sell” agreement. Each owner is insured through a life insurance policy – typically a low-cost term policy – for the amount agreed to in the “buy-sell” agreement.

For example, A and B are partners. They start a business worth $20,000. A and B agree to sell each other their share, in the event of death, for $10,000. A and B purchase term life insurance policies for $10,000 with the business as the beneficiary. B dies. The business receives the proceeds of the term policy ($10,000). A uses the $10,000 to pay the estate for B’s portion of the business.

In this way, the business is continued without deviation or interruption and the estate is provided for without the forced dissolution of the business. For the “buy-sell” agreement obtain the assistance of a lawyer in your state. For the term policy discuss the agreement with you insurance professional.