It is critical when owning or operating a business that you have plans in place just in case any of the owners, partners or key executives were to pass away suddenly. When starting a new business no one wants to prepare for a future where the company must go on without the guidance of its leaders, but it is a fact of life that none of us live forever and that we must prepare for the future.
One important source of protection that is available to businesses is key person insurance. Purchasing a key person life insurance policy will help to protect the surviving leaders and owners in the business. When starting a new business, it’s vital to consider how the death of a key manager or executive could impact the company’s day-to-day operation and also the financial impact it would have in having to replace the leader’s expertise and talents.
If the company prepares ahead of time and invests in key person insurance, the business will receive a cash payment if the individual covered in the policy passes away. The funds received from the insurance can then be used to help in the search to hire a replacement for the key person. This could be particularly important if an owner passed away.
Owners, especially in the early stages of the company’s formation, often devote a lot of unpaid time while drawing on a great deal of their experience and expertise. If someone new is brought in to attempt to replace that expertise that is not an owner, they will expect to be paid full compensation for their efforts. If there is adequate insurance coverage, this will ensure that the surviving owners will have the means to hire experts to replace the deceased owner.
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Another vital consideration that is often overlooked is taking into account any implications from an inheritance that could occur as a result of one of the owner’s death. Before agreeing to go into business with other partners or owners, it is critical to have a buy sell agreement worked out that outlines exactly what happens to each owner’s share in the business in the event they should pass away.
If a buy sell agreement is not worked out ahead of time you could end up having to share ownership of the business with your partner’s heirs. If you do not want this to happen you need to have a specific arrangement that specifies that the business will purchase the deceased owner’s shares in the event of their death. In order to have the money available to purchase the shares, a key person insurance policy should be purchased to provide the necessary funding. In the terms of the agreement you need to make sure that there the specifics of how the proceeds from the policy will be used should the covered individual pass away to prevent any misunderstandings.
The company’s business insurance coverage should be reviewed on a periodic basis. One of the important things to review is to make sure that there is adequate key person insurance coverage. Ensuring that the company has adequate key person insurance coverage is one of the major steps to take in preparing for your company’s future and preventing a difficult situation from occurring should a key member of your leadership team pass away.
