If a business involves a partnership, purchasing life insurance to satisfy a buy-sell agreement is something to consider. When a partner passes away, the value of a business can be inherited by the partner’s beneficiary, such as a spouse. The ex-partner’s appointed benefactor receives his or her fair share and eliminates the necessity for any involvement in the business. To purchase this type of policy, a value is applied to the business, and a determination of each partner’s share is established in the event a partner dies.
The second issue for purchasing this type of insurance is determining which type of product to use. There are several types of life insurance to select from, such as term, whole, universal or variable products. All types should be considered and evaluated to meet the needs of the buy-sell agreement. For example, for an interim business plan, a short-term policy would make the most sense. The policy covers for a specified “term” of years, and if the insured passes away during the time period stipulated in the active policy, then a death benefit is paid. Choosing a whole policy may be the most logical choice for long-term businesses.
Another type of insurance, usually for a small business, is called Key Person Insurance. The “Key Person” is typically an owner, founder or key employee whose passing would create severe economic loss and potentially sink the business. The company purchases a life insurance policy on its key person, pays the premium, and is the beneficiary of the policy in the event of a loss. A company should identify critical people and determine how much life insurance to purchase including such factors as: loss of revenue, expense of filling the role and training, and other areas pertaining to the person’s position in the company.
Companies can decide whether or not to purchase Key Person Insurance to evaluate their business continuity plans and their employees. It may be found that people who are key employees are made that way through lack of cross-training, business structure, etc. For example, take a key back-office person who handles critical functions for the office such as payroll, bookkeeping and main functions to keep the business running. Through cross-training to other employees and careful planning, in the event of a loss, the business will be able to move on without significant interruption. Another example is a sales person who generates 50 percent of the company’s revenue. A possible solution is to learn that person’s process and have a sales assistant work closely with them. In the event of a loss, the sales assistant will have relationships with the clients and be able to serve them.
About the Author: Anthony Tomaro, API, CPCU, is an investment advisory representative with Tomaro Financial Group in Wall Township.