Going into business with a partner is full of risks and unknowns (what happens if we don’t get along?). If you think your partner is bad, their spouse may even be worse! This brings up the second problem: if you or your partner passes away unexpectedly, one of you may find yourself saddled with a partner you don’t really like. To that end, life insurance is an important investment, as it may be the best way to protect the business, the surviving partner and the deceased partner’s family.
Find out now: How much life insurance do I need?
Business partner life insurance is just like any other life insurance you buy: the insurance company agrees to pay the deceased partner’s beneficiary a specific amount of money. You can also have business partner life insurance that names the surviving partner or the business as the beneficiary of the policy. The immediate benefit is that the survivors receive money when they are most in need of it.
Payable to Your Partner
Chances are you and your partner chose to go into business together because you each had something unique to offer. It could be expertise, labor or a special skill, but no matter talent what you or your partner possess, when you’re gone it leaves with you. Partner life insurance that is payable to the surviving partner can be used to help with the expense of replacing the deceased partner.
Find out now: How does life insurance work?
Insurance payable to the deceased partner’s spouse can be used to replace the late partner’s salary while the estate is settled and the partnership dissolved. If both partners agree in advance, this allows the deceased partner’s family to have income while the final terms of a buyout are completed. Of course, having a lawyer draw up an agreement that spells out how the value of the business is to be determined is essential to the process.
Fund a Buy Sell Agreement
A buy sell agreement is a legal accord between partners that specifies how one partner may buy out the other if certain events occur, such as death. The agreement would have either a pre-calculated value for the business or a method for determining the value. Partner life insurance could be used to pay the deceased partner’s heirs for their share of the business, thus ending the partnership and protecting the business. The insurance could be for the full value of the business or a partial payment with the balance due from the surviving partner based on the buy sell agreement.
This is commonly done by each partner owning an identical policy on the other partner’s life. The death benefit is payable to the surviving partner who uses some or all of the proceeds to buy out the deceased partner’s interests, as it is written in the buy sell agreement.
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