Key person insurance and business life insurance are critical products that many business owners overlook. Likewise, long-term disability insurance for executives and company owners can help the owner and their family financially survive a tragic event. These insurance benefits can also be used to fund a buy-sell agreement if ownership needs to be transferred to one or more of the partners.
What Is Key Person Insurance or Business Life Insurance?
Key person insurance is one of the many ancillary benefits DBL Center brokers can access to provide a full suite of coverage to their clients. Key person insurance, sometimes called business life insurance, protects the company’s financial well-being if a leader, whether that is a company founder, partner, or a top-level executive, dies or can no longer perform their job duties.
But if a business has multiple owners, the situation can become a bit more complicated.
What Is a Buy-Sell Agreement?
Often, business partnerships have an agreement in place to facilitate the sale of the company to one of the owners if something should happen to the other owner. In a buy-sell agreement, the owners will have the right (and, in some cases, will have an obligation) to purchase another owner’s shares if an owner dies or becomes disabled.
A buy-sell agreement can provide necessary income to the deceased or disabled owner’s estate. It also helps ensure the owner’s estate is compensated for the work, time, knowledge, and capital the owner invested in the business.
But what if the other partners don’t have the capital to purchase the owner’s share in the company?
That’s where key person insurance, business life insurance, or even long-term disability insurance for executives can come into play.
Any of these products can be used to fund a buy-sell agreement and transfer ownership of the company to the surviving, working partners.
Using Business Life Insurance or Long-term Disability to Fund a Buy-Sell Agreement
When the company uses business life insurance, the policy will be used to fund the purchase of the owner’s shares, paying out to the owner’s estate while giving surviving partners full ownership of the company.
A long-term disability policy can be used in the same way if the owner is still alive, but disabled and unable to perform their job duties any longer.
Using Life Insurance in a Cross-purchase Agreement
Alternatively, a cross-purchase agreement names each of the owners as beneficiaries on each other’s policies. This can get more complicated, according to an article that originally appeared in the Thomson Reuters’ Estate Planning Journal.
Rather than having a single policy covering the business, there must be life insurance policies for each of the owners, with the other owners named as beneficiaries. If there are three owners, you would write six life insurance policies, so that each party is a beneficiary for the others.
Help Your Clients Plan for an Uncertain Future with the Right Insurance
Having the right insurance protects not just individual employees and business owners, but the company as a whole.
By looking beyond statutory benefits like DBL and TDB, you can position your insurance brokerage as a trusted resource and consultant to your clients. Selling benefits like key person insurance, long-term disability, and executive life insurance not only helps boost your commissions, but helps give your clients peace-of-mind that their company is protected against any contingency.