Why is Buy-Sell Insurance Critical to Your Business’ Success and Continuity?

buy sell insurance

I always ask business owners if they have buy-sell insurance or partnership insurance. Surprisingly, about 50% of them didn’t know what it was, let alone possess it. When I asked if they had a Partnership Agreement in place, most answered, of course. Some were more formalized than others, but most saw the importance behind having a partnership agreement.

Then, I asked what would happen if a business partner should die, got sick or was disabled. Very few understood that insurance could play a vital role in the transfer of shares, the continuation of the business and payout to the owners’ heirs. Most didn’t realize that there are clauses within their Partnership Agreement that speak specifically to Buy-Sell Insurance or Partnership Insurance. Most didn’t know that their partnership agreement spelled out that insurance would fulfil this function very efficiently in the event of a death or disability of one of the partners within the business. Buy-Sell insurance is designed to buy out a partner’s shares if they die prematurely, become ill or be disabled.

Why Buy-Sell Insurance?

For one, it’s relatively cheap. If you didn’t have buy-sell insurance, the other partners would have to write a cheque to the affected partner’s estate to pay for the outstanding shares. The buyout would be in after-tax dollars.

It’s straightforward. It’s clean. It’s tax-efficient. The business can continue to function with minimal disruption.

Alternatives to Buy-Sell Insurance?

You could always approach the bank to finance the outstanding share buyout; however, if the business has just lost a partner, the bank will likely do so with great trepidation and not without assets guaranteeing the arrangement.

Buy-sell insurance can help prevent the departing owner’s estate from selling their share of the business to an unsuitable third party. Alternatively, the existing partners may need to go outside to seek a new partner because they can’t afford the buyout of the departed owner’s shares.

There have been situations where the business may be forced to bring on the deceased partner’s family as the partner. They likely will not fulfil the vital function of the past partner and may become a roadblock to making certain decisions within the business.

The Emotional Turmoil Runs Deep

Money will never wholly replace a partner or key person within a business, but it can limit the potential financial setback. There will be emotional downtime to restructure, reassign roles and responsibilities, and manage staff concerns and emotions. A significant influx of cash is something a company dealing with the loss of a key contributor, is never a bad thing to settle nerves, emotions and allow everyone to take a deep breath without feeling a major financial crunch. Depending upon the financial wherewithal of the business, Buy-sell insurance literally can save the business from financial ruin.

Buy-Sell Insurance is for Death, Sickness and Disability

Many partnership agreements spell out buy-out arrangements in the event that a partner dies, or is unable to work due to sickness or disability. Many businesses have spent a tremendous amount of money paying a lawyer to write up a comprehensive contract outlining their rights within the business arrangement should something happen to them. Even though in most cases it spells out the need for insurance to facilitate this need, many never get insurance. Often, if they do have insurance, it’s for life insurance only. There’s a significantly higher probability of one of the parties getting sick or disabled.

Buy-Sell Insurance Needs to be Revisited as the Business Grows

The other challenge I often see is when a business has taken out buy-sell insurance on the partners of a company while it was in its infant stages. I’ve revisited contracts for when a business was just starting out. There was insurance taken out on the owners for $1 million dollars but due to growth and expansion, the need was now ten times the original amount. This isn’t an insurance contract that you put in a filing cabinet and forget about it. It should be revisited every year with your insurance advisor.

There’s a Likely Chance You May Never Need It

Chances are you may never cash out on an insurance policy. Those policies may still have some intrinsic value. Buy-sell policies can be converted to permanent insurance, thus giving an opportunity to minimize future taxes. They can be donated to a charity that can tremendously benefit others, whilst earning a significant tax credit and leaving an incredible legacy and helping to build your corporate brand.

Life events like sickness, disability or death are random events that may never happen. We don’t buy house insurance because we think our house will burn down. We buy it on the remote chance that it may. For most people, their house is their largest financial asset and warrants being safeguarded. For many business owners, their business value dwarfs the value of their home, represents their future income, so shouldn’t we protect it in the same way.

Losing a principal of a business is a devastating loss to a business. Do you really want your business partners and your family to become embroiled in a legal battle that can be addressed so easily with the purchase of buy-sell insurance?

Author’s Bio

Through the bankruptcy of his first business, a strong balance sheet means nothing unless you can get the money out of your business and into your hands personally, tax efficiently, and creditor protected. Chris helps and coaches business owners to avoid a similar fate as he suffered in his first business.

Through several clever strategies, he illustrates how these little-known vehicles can get money out of your business efficiently, build your corporate brand and create a legacy through charitable means to help make a meaningful difference in the lives of others.

Also, he has seen the impact that mental health can have upon success within your business and your life and how the two are on a constant collision course. When Chris became aware that Entrepreneurs struggled with their mental health at more than twice the rate of average adults, he realized he wasn’t alone and made it his ambition to understand why and do something to help. His business, The Finish Line Group, aims to help support the entrepreneur’s financial, philanthropic, and emotional needs.

Chris’ Why Statement remains, “To openly communicate the lessons learned from my past so that others will thrive in their lives, minimize their setbacks and leave a positive and lasting legacy.”