Here’s a nightmare for you. You and your partner signed a partnership agreement, began your business, built it, and were on the verge of seeing it really take off when the unthinkable happened: your partner was hit by a drunk driver while crossing the street on the way to work and killed. Not only do you have to cope with a shattered (business) life, but also you have to face the grueling details of buying back your partner’s interest in the business. Not surprisingly, your partner’s spouse is pestering you for the money in order to meet family expenses. But the value of the business interest is far greater than cash flow. Where will you get the money?
That’s where a bit of planning can help everyone breathe easier during this difficult time . . . and life insurance can help. As Richard Ginnaty points out in his article on the subject, “Life insurance on the partners in a business can be an effective way to ensure that the business survives the death of a partner and provides funds to the beneficiaries of the deceased partner.”
Business owners have a choice: either the company can own the policy or the partners can own the policy and then use the funds to buy the deceased owner’s interest. But as Ginnaty notes, there are tax consequences depending on the path you choose. Either way, make sure your accountant, attorney, and insurance professional are all on the same page so that you benefit from a cohesive strategy!
I have noticed lately that there are alot of concerns about life insurance policies and the fact that you have to keep them for at least a year or whatever the term says before you can actually bank on the policy. So if you get a life insurance policy and you die in 2 weeks, then you do not get the life insurance payoff because you died too fast (no matter what the reason is). It is important to check out the life insurance company you are going to be dealing with on this aspect.
If I have a life insurance policy that is good for 5 years and I join the military will the life insurance policy be revoked? Or if I start any other new job that is hazardous do I have to report it to my life insurance company?
Once life insurance policies are issued, the insurer typically can’t revoke the policy unless the insurance application at the outset involved fraud, misstatements, or the withholding of material information. (If the policy were revoked, the insurance company would refund all premiums paid.)
The issue of a new and hazardous job could come into play if the person died during the policy’s contestable period (the first two years). During the contestable period, the insurer can make inquires and possibly deny a death claim if the possibility of taking a hazardous job was known by the applicant but withheld during the application process. (During the application process, the disclosure of a hazardous occupation or hobby might result in a policy issued at a much higher premium—-or not at all.)
Also note that after September 11, 2001, many insurance companies revised and relaxed their exclusion of death claims that resulted from acts of war. Therefore, the easiest way for the person to answer this question, says one industry expert, is to ask the insurance company directly or their insurance agent.
I’ve worked with so many business owner’s in partnerships that don’t spend 1 moment thinking about these issues. As soon as I turn to one and say: "How would you feel about working with your partner’s spouse?" it really gets their attention!
Haha! This should be enough to get anyone to buy a life insurance policy!
Ah yes … but sadly, Jason, it isn’t. We entrepreneurs can be a little grandiose at times (we have to be really, to keep pressing forward in our businesses), and think, “Oh, that will never happen to me.” Well of COURSE we’re not hoping or planning for it to happen … but sometimes, it does. And sometimes, costs and cash flow can be an issue in securing life insurance in appropriate amounts, especially if the business partners are at different life stages, or have had any illness in their history.
We are trying to set up a Life Ins. Policy with Four Business partners each partner received a quote for a Term Life Ins. Policy. The Business is paying each owner to purchase his or her policy one policy is three time higher per year then the others
The way we decided to deal with this sense we are using Company profit to pay for this is to use the higher Policy as a benchmark and give each owner that cost to pay for his or her policy.