If you have been in business for a while, you’ve probably heard the term ‘Key Man’ insurance. In this post, I’m going to teach you the basics of using key man insurance to buyout a departed owner’s successor.
Have you ever asked yourself the question;
Do I really want to operate my business with my departed partner’s successor?
Chances are the answer is ‘no’. This is an important issue to address when ownership is shared. You did not go into business with your business partner’s wife or husband. You went into business with your, now deceased, business partner. The person who shared your vision and built a business with you is now gone. Not only are you dealing with the loss of a good friend and valuable resource, you are dealing with the ramifications on your business. In most cases, the departed owner’s spouse will be their successor and assume control of the deceased’s ownership.
Let’s face it, neither you nor your partner’s spouse wants to be in this situation. It would be better to avoid it altogether, right? Does your company possess the liquidity to buyout your deceased partner’s spouse?
Key Man Insurance is the solution that will carry all parties through this challenging and mentally draining situation. Without going into a lot of detail, here are the basics;
- Your company purchases key man insurance policies (typically term life) on each partner/owner
- Name the partner/owners’ spouses as beneficiaries.
- The Death Benefit from the life insurance policy finances the buyout of the spouse’s share
Remember this information is provided to give you a basic picture. You’ll need to help of three competent professionals to properly establish this agreement.
- A CPA will review the tax implications of the agreement
- A Life Insurance Agent will write the key man life insurance policies
- An Attorney will draft a comprehensive ‘Buy-Sell Agreement’
The death of a friend and business partner is challenging enough. I encourage you to create a plan that deals with it. Once you have set up a comprehensive plan, all parties will sleep better at night.
This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. Please consult with a professional specializing in these areas regarding the applicability of this information to your situation.