How to decide if term insurance is right for you
Written by Michelle N. Ogborne

Is term insurance right for your business?

Death is inevitable. Though no one likes to think about their own demise. Consider what would happen if one of your business partners were to pass away. Would you have the cash to buy out their share of the business? Adding a buy-sell agreement to your partnership, funded with term insurance, may be a good option.

What is Term Insurance?

Life insurance policies are available in permanent and temporary varieties. Term life insurance is a policy that is purchased, paid for, and in effect for a set period of time. It has no cash value unless the insured person passes away during the term.

Term insurance is less expensive than a permanent policy.  Unlike a permanent policy, it is easier to re-evaluate annually. On the other hand, a permanent policy can be borrowed against.

If you and your partner have decided that you will eventually sell your business, a term insurance policy may be a good option. If someone were to die before that time, the surviving partner receives the proceeds of the other’s policy. He can use this immediate cash to purchase the other’s business share according to the buy-sell agreement.

Structuring a Buy-Sell Agreement with Term Insurance

Your death or your partner’s death doesn’t mean your business has to end. It’s a good idea to consult with a business attorney when structuring a buy-sell agreement.

The three main types of buy-sell agreements are:

  • Cross-purchase plan. With a cross-purchase plan, each owner purchases a life insurance policy on the other owner(s). Each owner pays the premiums on their policy and is the beneficiary of those policies. When an owner dies, the surviving owner(s) use the money from the policies to purchase the deceased’s share. When there are multiple owners in a business, each owner purchases multiple policies.
  • Entity redemption plan. With an entity redemption plan, each partner agrees to sell their interests to the business if they die. The business pays for separate term insurance policies for each partner. It is the owner and beneficiary of the policies. If a partner dies, their share of the business passes to their heirs or estate. The company may purchase it with the proceeds from the term insurance.
  • Hybrid plan. This is a combination of the cross-purchase and entity redemption buy-sell agreements. The partner must offer their interest to an entity. If the other entity declines the purchase, the surviving partners or co-owners could purchase the deceased’s shares. This could be structured to allow certain employees the ability to purchase the interest.

Business Planning for the Future

Death of a business partner is no easier to think about than the death of a loved one. The simple truth is that it will happen and it’s better to have a plan in place. Whether you’re starting a new business or your business has been established for some time it’s important to have the proper legal protection and documents in place. At Ogborne Law, we work with small business owners to protect the business so you can protect your family and employees.

Protect your business and the livelihood of your employees. Contact Ogborne Law to discuss partnership agreements and buy-sell agreements for your small business.