Key Person Insurance and Buy/Sell Agreement
When you start a new business with one or more people, you are likely to have partners who you are happy to work with. Partners are likely to be people who have common business goals and complementary methods of achieving those goals. However, if some tragedy occurs that results in the death of one of your partners, their share of the business may pass on to their beneficiaries. When something like that happens, the surviving partners may find themselves working with someone who does not have the necessary business expertise or someone who they are not comfortable with. Since this could spell disaster for any business, it is necessary to take some steps to prevent such a scenario, which can be done by opting for buy/sell insurance for your business.
Buy/sell agreement is an agreement that allows surviving partners to purchase the shares of a deceased partner, or a partner who does not want to be a part of the business any longer. A main component of such insurance is the buy/sell agreement. This agreement is entered into by all the partners of the business and specifies how the shares of any partner will be handled upon their death or when they wish to leave the company. The buy/sell agreement will also typically state how the business will be valued at the time a partner leaves the business. With such an agreement in place, the remaining partners of a business can rest assured that the stake of a deceased partner will come back to the business, rather than going to their estate or beneficiaries.
The money that is needed to buy the shares of the partner who is leaving the business comes from the buy/sell agreement. This agreement can be in the form of a key man policy that is purchased for every business partner, with the business being the ultimate beneficiary. The level of cover that you need can be determined by analyzing each partner’s share of the business as well as the amount of money that may be required to buy their stake from the partner’s estate or their beneficiaries.