Key Man Insurance and Buy Sell Agreements: Why You Need Both

Key Man Insurance and Buy Sell Agreements: Why You Need Both
Page content

Protect Your Investment

key person (sxc.hu)

When you start a small business, it’s important to have plans in place to protect your investment, your business partners, and the best interests of the family members of everyone who has an ownership interest in the company. That’s why business insurance planning that includes a sufficient amount of key man insurance coverage is so important. No one wants or expects something bad to happen to one of their business partners, but the reality is that none of us knows what the future holds. When you have key man insurance and buy-sell agreements in place, you’ll be financially prepared to allow your business the opportunity to continue to move forward, even in the event of a worst case scenario.

About Key Person Insurance

Including key person coverage in your business insurance planning involves purchasing a life insurance policy on each of the partners in your small business. The policy should name the business as the beneficiary. This type of coverage provides funding needed to keep the business operating if one of the partners is no longer living.

No matter how small or large your business is, losing one of the partners could be financially devastating. For example, the surviving partners would likely have to hire someone to perform the tasks the deceased partner was responsible for. Proceeds from the policy could be used to cover the recruiting, training, and payroll expenses for a period of time. If you have a buy-sell agreement in place, the money can also be used to purchase the deceased partners ownership interests in the company from his or her estate.

About Buy Sell Agreements

When you start a business with one or more people, you are making a major commitment. While you are likely to be comfortable working without your partners, there’s a good chance that you don’t want to work with their heirs. That’s why you need key man insurance and buy sell agreements. If a business partner dies, his or her ownership interest in the company will go to the estate unless plans are made and documented in advance.

Typically, buy-sell agreements specify the exact terms and conditions under which shares in the company can be sold or transferred to another individual, and details provisions that will enable the business to purchase outstanding shares from the estate of a deceased partner. Such agreements typically include details about how the stock will be valued.

Buy sell agreements often include a specification regarding the type and amount of key person life insurance the company will carry to ensure funds are available to purchase the stock. In some cases, agreements specify the percentage of the insurance policy proceeds that will go to the estate in exchange for the stock and the percentage that will stay with the company.

You can draft your own buy sell agreement or hire an attorney to create the document for you. If you draw up your own agreement or use a form from a legal software package, be sure an attorney reviews the document before you put it in place. This will allow you to verify that your agreement is compliant with all relevant laws and regulations.

Sound Business Insurance Planning

This type of key man insurance and buy sell agreements in business insurance planning results is a responsible way to protect the interests of the family members of each business partner, as well as the best interest of the company and all surviving partners. Various factors should be considered when determining the dollar value of coverage to include in your business insurance planning efforts, including the cost of coverage, the financial impact of losing a partner, and the costs associated with enacting the terms of your company’s buy sell agreement.

Resources:

References:

  • SmallBusiness.DNB.com (smallbusiness.dnb.com/buying-exiting-businesses/purchasing-a-business/1301-1.html)
  • KeyPersonInsurance.com (www.keypersoninsurance.com/whatis_keyman_insurance.php)

Image Credit: Sxc.hu (spekulator)