How Business Owners Use Life Insurance to Fund Partnership Agreements
It’s a common practice for business owners to take on partners. While there are many reasons behind why you may want to take this step, there are also some crucial things to consider when entering into a business partnership. What legal bases do you need to cover? How can life insurance protect you, your business, and your family?
What a Partnership Looks Like
Some business owners enter a partnership because they need someone to complement their personal strengths. For example, one person could be an expert in operations, the other in sales and marketing. Sometimes professionals with the same area of specialization will join together to serve more clients. In other arrangements, one partner could be passive and responsible primarily for funding, while the other is the active manager of the enterprise.
The partnership could and should be a very structured relationship. A legal agreement should be formulated and should cover all the financial technicalities such as the percentage of ownership, tenure of the partnership, how and when the business is to be valued, etc. It should also plan for events that may dissolve the partnership, such as the death, disability, long-term sickness, or early retirement of a partner.
How Life Insurance Can Help
Life insurance plays a key role in the funding of a partnership agreement. When a partner dies, that person’s spouse or estate will probably end up with his shares of the business. The surviving partners want those shares, but they need money to buy them. Life insurance can provide the exact amount of money to do that at the exact time it is needed. It is typically a much more economical way taking care of things compared to other options such as taking cash out of the business, selling assets, or borrowing from a bank.
What are some integral pieces to consider when using life insurance to fund your partnership agreement?
Finalize Your Agreement
Before you do anything else, get the arrangement finalized before you get approved for your policy. There is nothing worse than getting approved at a great rate, only to delay paying for the policy because the legal work has not been completed. Until it is, you won’t have coverage, and something disastrous could happen that could either raise the price significantly or disqualify you altogether.
Costs Will Vary
Remember that not everybody qualifies for the same price. Each person represents a different risk profile to a life insurance underwriter. Age, gender, smoking status, health history, and a multitude of other factors affect the rate. Don’t expect life insurance to cost the same for each partner.
Explore Your Options
Research your options for policy ownership. In some instances, your business should be the owner and the beneficiary of the policies. In other cases, partners should own policies on one another. Talk this through with your business advisor to make sure your policies are issued correctly and fit your needs.
Life insurance is critical for business owners. It covers you, your business, your partner, and your families, and can be a game changer if the unexpected occurs. Don’t get caught without it. I’d love to hear from you and answer any questions you may have.