Life insurance proceeds can be used to buy out a deceased partner’s interest – or cover losses related to the death of a key employee.
Funding a buy out
Business agreements between 2 or more business partners typically require that if 1 partner dies, their business interest will be bought out by the company or the other partners. Life insuranceLife Insurance Insurance that pays cash to your family or other beneficiary after your death. This can give them income and help pay your funeral and other final costs.+ read full definition can be an effective way to provide the money to fund the buy out.
Here’s how it works:
The company buys life insurance to insure each partner.
If a partner dies, the company (or the surviving partners depending on the insurance arrangement) can use the insurance money to buy out the partner’s business interest.
The deceased partner’s beneficiaryBeneficiary The person(s), institution, trustee or estate you choose to give money, property or other benefits when you die. You may name beneficiaries in your will, insurance policy, retirement plan, annuity, trust or other contracts.+ read full definition or estateEstate The total sum of money and property you leave behind when you die.+ read full definition receives the buyout money immediately, and the business can carry on without the additional financial burden of securing money from loans or cash reserves to make the purchase.
Key person insurance
You can also buy life insurance to insure any important person in your business. This is known as key person life insurance. This can help replace any lost revenue that results from the person’s death, or cover the costs of finding someone to take that person’s place.