Why Getting Life Insurance for a Business Partner Makes Sense

handshakeWorking with a partner makes it possible for you to leverage their experience and possibly some of their available capital to help your own cause. When you team up with someone else, it has the potential to help both of you. In this situation, there are several problems that could arise. One of the biggest issues that people in this arrangement have to deal with is figuring out what to do when a partner unexpectedly passes away.

If you are working closely with a partner and he passed away prematurely, it could devastate the company. To prevent this from happening to you, it may be in your best interest to buy adequate life insurance for your partner.

Let's discuss how a life insurance policy help your situation?

Help surviving partner maintain company

Many partners get life insurance policies on their counterparts so that they can minimize the financial risk they may be facing. Most partners carry with them fundamental knowledge and/ or experience that helps the company run. If you had to replace one of them, you would probably need a lot of resources to train someone and money to get over the hump in the meantime.

When you have a life insurance policy on your business partner and they pass away, you’ll receive a large sum of money. You can use that money to help the company financially or to compensate yourself. Whereas if your partner dies and you don’t have a life insurance policy on him or her, then you are basically out of luck. You’ll be left trying to pick up the pieces and run the company on your own. In many cases, this ends up destroying the company and causing it to close down.

Ease the transition to new partnership

If you have a partner and you want to prevent something catastrophic from happening upon their death, you’ll need to choose a life insurance policy to go with. Figuring out how big of a policy to get can be challenging. It may be hard to put a price on what the other person brings to the table.

One way that you could look at it is how much money the enterprise generates as a result of that person’s efforts. For example, if your company does $1 million in sales per year, you may come to the conclusion that your partner is responsible for $500,000 of that success and you’re responsible for the other half. In this situation, it might make sense to get a $500,000 life insurance policy on your partner. This way, you can make up for their loss and give yourself a year to find someone else to step into his shoes.

Avoid conflict with surviving family

In this situation, you may also want to look at whether you will have to buy that partner’s share of the enterprise from family members. In many cases, company owners will leave their portion to their family. This will create a situation in which the spouse of the deceased owner owns part of the company. Then the surviving partner has to buy that portion of the company from the spouse.

Buying the Ownership from Family

When trying to determine how big of a life insurance policy to buy, you may want to look at how much it will cost for you to buy the other half of the partnership. This can be done by coming up with a value of the business.

You can then decide to buy a policy that would represent your partner’s share of the arrangement. It is usually best if you create a buy-sell agreement between you and your partners. This way, you agree on a sales price for their share of the company before they pass away. Then if one of the partners dies unexpectedly, you can simply get the insurance money and buy their share without any problems along the way.

No matter what type of partnership you are in or what type of arrangement you have with your partners, it is generally a good idea to purchase a life insurance policy on them. They’ll have to sign off on it, so that they are aware you have a life insurance policy on them. At that point, you will be protected financially against the loss of your partner. It’s never easy to deal with the death of a trusted partner, but having a good life insurance policy in effect will help you deal with the problem a little bit easier than you otherwise would be able to.

One Comment

  1. Many people who own their own business have their entire life savings invested in their company. If they die, they would bankrupt both their families and their business…
    All partnerships should have some type of life insurance… if not for the sake of the company, but for the sake of the family.

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