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Key Person Insurance As A Means To Fund Partnership Buy-Outs!

Posted by John Stege | Jan 15, 2023 | 0 Comments

                                                                      Key Person Insurance

Editor: The Law firm of John V. Stege, P.C. does not endorse or advocate any outside services or persons. This article by Megan Stevens is presented for informational purposes with the permission of the author. One thing that often comes up with my clients is "If I have to buy out a partner's interest due to death, how do I find the money?" Key person insurance can be a great method to deal with this problem.

Key Person Insurance: by Megan Stevens, Comparion Insurance Agency, 720-435-8792

From general liability to personal property coverage, insurance is there to help consumers and businesses financially recover from the hardships of a serious claim. But how can life insurance fit into the total insurance equation? For most business owners, life insurance is a coverage that's often overlooked, when there are important considerations for protecting the many variables of a growing business.

With so much time, effort, resources, money, love, and teamwork required to maintain a successful business in today's age, it's worth taking time to learn more about a particular type of life insurance policy for businesses: Key Person Life Insurance.

Key Person Life Insurance

Key person life insurance (also known as “key woman,” “key man,” or “business life insurance”) is put in place to provide a business with liquid funds in the event a critical employee or other person vital to the success of the business should pass away or become disabled. These policies are opened and paid for by a company, with said company as the named beneficiary in the event of the key employee's death or disablement.

Here are some questions to ask when considering a Key Person Life Insurance policy:

- Does the business rely on an individual who has provided positive benefits to the company's bottom line?

            - What would happen within the company if said individual suddenly died?

            - If the company were to lose a key employee, would the business experience a serious financial setback?

If any answers to the above revealed the importance of a key employee (or employees) within a company, it may be worth investigating a Key Person Life Insurance policy!

Funding “buy-sell agreements”

A “buy-sell agreement” or a “buyout agreement” is a contract between the co-owners of a business. In the event of a co-owner's death or disablement, the agreement allows the surviving co-owner to buy the deceased business owner's share of the business from the heirs of the estate, at a pre-determined price.

Important Consideration: How can a co-owner be sure that there will be enough funds to buy the remaining share of the business upon the other co-owner's death?

It's important to know that life insurance policies can often be used to fund these sorts of buy-sell agreements. For example, two co-owners of a business each buy a life insurance policy that's taken out on the other co-owner. Upon the death or disablement of one co-owner, the benefits are paid to the surviving owner.

If ensuring the continuity of your business after death is important to you, talk to a life insurance professional about setting up a buy-sell agreement funded by a life insurance policy.

Individual life insurance for businesses

Commercial businesses can carry a great deal of monthly overhead; from rent, to inventory, to loans and vendors, bills must be paid to keep the business operating. Let's say you own a profitable business of your own! You're managing the daily revenue activities, bringing in new clients and business partners… If you were to die or become disabled tomorrow, would your loved ones be able to keep the business operating as normal, or would they be forced to liquidate and sell their share in the company?

Buying an individual life insurance policy as a small business owner can help ensure that upon your eventual death or potential disablement, your loved ones will have the immediate cash necessary to help keep the doors to the business open, while their next move is decided. This money can be used to pay the company bills, or even fund the salary of a new key employee to help run the business after you're gone.

In the end, life insurance may seem like just another bill, but in the world of a small business owner, it's an essential part of ensuring that the business they've worked so hard to build has the chance to grow and thrive, by ensuring security through preparedness.

For more information about getting started with life insurance, call Megan Stephens at 720-435-8792 for a free consultation, and we'll work together to discover which options are best for you.

Megan Stephens


About the Author

John Stege

John V. Stege, Esq. has been practicing in the areas of Debt Relief Negotiations, Bankruptcy, Estate Planning, Corporations and Real Estate law in Denver, Colorado since 1990, helping small businesses, professionals, and individuals with their debt relief, business and estate planning needs. M...


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