Business Partnership Life Insurance, Why Get It and What to Get

business partnership life insurance

If you’re in a business partnership, you already have a lot on your plate. You have to manage a business, a team of employees, and keep your clients happy. This can take up a lot of your time and energy. Unfortunately, it’s likely that you overlooked life insurance.

Your business partnership needs life insurance just like you do personally. Life insurance for your business partnership is an essential part of your business. Without it, your business could suffer some major consequences.

Next, we will get into some details about business partnership life insurance so you can see how it works and why you should get it.

What is Business Partnership Life Insurance 

Life insurance can be specifically designated for business partners. This gives the business partners protection in case one of the business owners suddenly passes away. 

With one of these policies, you will still be expected to pay a premium each month, you will still own the policy, and your name or names will still be listed as the beneficiary.

It works like a regular life insurance policy, but it’s specifically for use by business partners. The business partners who have business partnership life insurance are protected in case of this situation. They will have less to worry about in case death occurs suddenly.

Why Should You Get It?

It’s a good idea to plan ahead. Business partnership life insurance does just that. It helps you to prepare for the future in case anything would happen.

The main reason you should get life insurance for your business partnership is that it will provide protection in the event that one of the business owners passes away.

All too often, people don’t think about other people dying before they reach the age of retirement or even older. In reality, death can occur at any time. This is why it’s so necessary for you to be prepared. This could seriously impact your business in a negative way.

How Does It Work?

Life insurance for your business works in a similar way to regular life insurance. It offers protection in the case of death. This can help you out immensely. You should have life insurance for your business so that you can be prepared for a business partner’s death.

Basically, life insurance for your business partnership provides you with a death benefit like regular life insurance would. This benefit can then be used to keep the business afloat until a replacement is found for the business member who passed away.

This has been helpful for many businesses because they often cannot function unless all of their owners are able to work. When you lose a business owner or another important business member, your business will suffer. This benefit gives you some time so that you can figure out how to handle the business without this key person.

Business life insurance also allows you to use if for serious injury or illness in some cases. This doesn’t apply to all policies, but it can be an option.

What Happens If You Don’t Get It?

If you don’t get life insurance for your business partnership, you will experience some difficulties with your business if your business partner passes away. You will have to find a replacement for your business partner. There are costs for recruitment to worry about.

If nobody is trained in that particular position, you will likely have to shrink your business’ capacity until someone is able to learn the ropes. This can have a negative impact on your business’ success because you won’t be able to serve as many clients.

It’s best to get life insurance for your business partnership so that you can be prepared in case anything does happen. This protection will come in handy for your business and keep it running.

What Type of Life Insurance Should You Get for a Business Partnership?

You will have three main options for life insurance for a business partnership. You should do your research before getting one to ensure that you get the best one for your needs. It can also be helpful to talk to someone who is experienced in this area.

Not all of these types of life insurance are a good idea for all businesses. There are certain terms and conditions associated with each one that makes them better for one business than another. Don’t jump into one of these policies because they sound good. Make sure they work for you, your business, and your business’ needs.

Key Person Life Insurance

With key person life insurance, you will appoint someone to be a key person in your business. For many businesses, this would be the owner or another person in a higher-up position. Basically, you need to designate someone who greatly impacts your company’s profits.

Think about who would have the most significant negative impact if they passed away. This is the person that you should insure. This is also because they will be the hardest to replace. It could take years to train a new employee to the same level of success.

Buy/Sell Agreement Life Insurance

In a buy/sell agreement, you and your business partner need to figure out how you will transfer the business’ equity in the case of death. It’s essentially a plan for what to do in this situation. These agreements are typically made up of two components: a transfer agreement and a funding agreement. These are set up with the business partners’ life insurance policies.

This agreement helps to ensure that the business is handled properly. Without it, the surviving business owner might make for a rocky transition too. It keeps the whole process much more conflict-free.

With a buy/sell agreement, you will be setting up an agreement. This buy/sell agreement needs to be funded between you and your business partner so that you can follow through with the agreement if needed. This can be funded in one of two ways:

Cross-Purchase: To cross-purchase life insurance, you and your business partner will buy life insurance on each other. Then, you will name yourself as the beneficiary. It’s best for you to pay the premiums for the policy with your name on it. This helps to ensure that you are protected if your business partner was to stop paying.

Entity Redemption: This is a similar process to cross-purchasing, but the company is responsible for purchasing the life insurance policies. Policies should be purchased for each of the company’s partners. This is used more often in larger companies with more entities. If you only have one business partner, this one may not apply to you.

Business Expenses Life Insurance

This type of life insurance is most beneficial for businesses that have fewer than 5 employees that are currently working for an income. This one is used for injury and illness instead of death specifically.

Business expense life insurance gives you the benefit that you need in order to pay for all of your monthly expenses. As a business owner, you know how important it is to stay on top of these expenses. If you’re sick or hurt and cannot work, this kind of life insurance will keep you and your business afloat temporarily.

Term or Permanent

In addition to having the previous three types of business partnership life insurance to choose from, you need to select term life or permanent life insurance.

Term life insurance lasts for a given term. This might be 10 years, 20 years, or 30 years. Permanent life insurance lasts for the duration of the insured’s life.

In most cases, term life insurance is the way to go. This is the case for businesses and your personal life insurance as well. Overall, permanent life insurance ends up lasting much longer than necessary and it costs more money too.

Term life insurance for businesses is usually sufficient for businesses that aren’t expected to last for an entire lifetime. This applies to nearly every business. A 30-year term is totally reasonable for most companies. This is also the most affordable type of life insurance.

If you plan to continue to own a company for many years, it can be worth it to get whole life insurance. This just isn’t always necessary and can cost more money than you need to spend. Often, permanent life insurance gives you and your business more than you need, which isn’t necessary.

Take a look at the types of life insurance and see which one offers the best duration of time for your specific needs. For most people, term life insurance is the best option!

Where to Get It

You have a couple of options when it comes to getting life insurance for your business partnership. Either one of these should work well for you, but you can choose what you’d like to do. Note that choosing an insurance agent who works with one single insurance company may lead to biased information.

Independent Agent or Agency

Your first option is to work with an independent agent. It’s essential to work with an independent agent. This is because an independent agent represents many companies with many policies.

They aren’t tied to one specific insurance company so they won’t give you information with a bias. They can be honest with you and show you everything you need to know. An independent agent should try to teach you everything there is to know and won’t make you feel like you have to go with a particular company or policy.

Agency Experienced in This Realm

There are insurance agencies who work specifically on business-related insurance policies. They know what they’re doing when it comes to insuring businesses and their members, which is why they can be so useful to you.

The benefit of using an agency that is experienced with business insurance policies is that they know what they’re doing. They can show you what’s going to work best for your particular situation. Working with an agency gives you access to several agents who are familiar with business partnership life insurance policies.

How Much Life Insurance Do You Need for Your Business?

It can be challenging to know exactly how much life insurance your business needs. You might not be able to tell until you’re actually in that moment of needing to use your life insurance. This would naturally put you in a tough spot since you wouldn’t be properly insured.

It’s best to attempt to calculate this amount ahead of time so that you can properly insure your business members and protect your company. If you can’t figure this out on your own, consider talking to an insurance agent for some guidance.

This is one way to figure out the amount of coverage you and your business will need:

  1. Complete a business valuation. This will show you how much your business is worth.
  2. Multiply the business’ value by your business partner’s equity percentage.

The final total should be how much life insurance you need to buy. You can benefit from buying a little bit extra for a couple of reasons. First, you will likely experience a growth in revenue at your business over time. Second, your partner’s job may have to be replaced, which may not be a quick transition.

By getting additional life insurance, you are planning for the future properly. This is in the best interest of you and your business alike! You could also talk to an appraiser to get more accurate information on your company’s worth, but this isn’t usually necessary.

Every business partnership should have a life insurance policy in place specifically for their business. As hard as it may be to talk about, it’s important to have a plan in case of the death of an owner or another important person.

Your company will need to replace the work that the owner or another person has done. Your business cannot function without that key role. With life insurance, you won’t have to be under so much stress as you work through all of those details.

Without life insurance for your business, you and your team will have a lot more to worry about as you adjust to the new normal. Life insurance simplifies this process and can help you to relax a little bit during this troubling time.

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The good news for you is you’re in the right place. We’re an agency that specializes in servicing business owners. We shop around with all the top A-rated companies on the market to get you the best rate, at no extra cost to you! Give us a call today at 212-573-5563 or compare life insurance quotes online. Welcome to CFAinsure!