Business Partners & Life Insurance

“Business is a game, the greatest game in the world. If you know how to play it.” These were the wise words once uttered by Thomas J Watson Sr., Chairman of IBM.

Any successful business person who knows how to play this game will tell you that the quality of the game is strongly influenced by the quality of the players.

If you are in business right now, you will fully comprehend this sentiment. You will know that you, your partners and certain key people in your business form a team, with each individual contributing something unique and that all of these ‘somethings’ eventually tally up to create the sum of your success…and the sum of your risks.

Mitigating the risks is normally done by extensive business continuity and succession planning. Here too life insurance has a crucial role to play, and offers two options to businesses to help address the risks presented by the death or disability of a partner or a key person. These options are: Buy & Sell Insurance and Key Person Insurance.

Buy & Sell Insurance

Buy & Sell insurance products create the opportunity for business partners to ensure one another’s lives, the proceeds from which can be used to purchase a partner’s stake in the business if he or she becomes disabled or dies.

How Buy & Sell Insurance works

You and your partner/s draw up a legal agreement to the effect that should any one of you die or become disabled the rest of you will purchase the affected partner’s shares in the business.

If you are only two partners in the business, you will own the benefits on your partner’s life and vice versa.

  1. If you are three partners, two of you will co-own the benefits on a third partner’s life.
  2. Partner A & B will co-own the benefits on Partner C’s life
  3. Partner A & C will co-own the benefits on Partner B’s life
  4. Partner B & C will co-own the benefits on Partner A’s life

The size of the co-ownership will be proportionate to the partners’ respective shares in the business.

Risks addressed

By purchasing Buy & Sell Insurance, you can mitigate the following risks in your business:

  1. The continued existence of the business may be threatened
  2. Credit facilities may be affected
  3. The affected partner’s beneficiaries may obtain a controlling interest in the business
  4. Inability of partners to afford the affected partner’s shares
  5. Affected partner’s share may be sold at a low price to outsiders

Benefits

For the remaining partners, having Buy & Sell Insurance in place means that the business can continue with minimal disruption. It eliminates the risk of potentially unsuitable outsiders joining the team and is relatively inexpensive.

For the affected partner, there is the knowledge that his or her beneficiaries will receive a predetermined amount as a cash payout and that the business that he or she helped built can continue more or less as usual.

Key Person Insurance

Key individuals in the business are not always partners only. Often they are employees that have a significant impact on the success of the business, and losing one of these employees as the result of death or disability could have a detrimental effect on your business’ overall performance. Regardless of whether the key individual is a partner or an employee, Key Person Insurance is a good way to help you mitigate this risk.

How Key Person Insurance Works

Although there is no silver bullet to help you identify a key person, he or she is normally someone who:

  1. Possesses of exceptional, specialist skills and abilities
  2. Builds goodwill for the business
  3. Contributes to the creditworthiness of the business
  4. Knows how to attract and retain people talent.

The business will insure the life of the key person and, because the business is the policy owner, will undertake to pay all the premiums. Naturally, should the unthinkable happen, the business will be the beneficiary of the Key Person Insurance Policy.

Here are some things you may want to consider when you calculate how much the cover should be:

The time it will take to replace the person

The time it will take the replacement to attain the key person’s contribution levels to the business in terms of profitability. This normally averages out at around seven times the key person’s annual salary.

The costs associated with finding and replacing the key person.

You can weight the amount according to the business’ ability to absorb some of the costs / losses that may be incurred.

Risks addressed

By purchasing Key Person Insurance, you can mitigate the following risks in your business:

  1. The loss of expertise and experience
  2. Supplier relationships are affected, resulting in stricter terms
  3. Lower sales volumes
  4. Lower turnover and a decline in profitability
  5. Time delays as the result of finding a replacement and getting him / her up to speed.

Benefits

Key Person Insurance provides a lump sum that can be used to fund the recruitment and the training of the key person’s replacement. It allows you to offset at least some of the temporary reduction in turnover and can help you to retain your usual terms with your suppliers.