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 insurance 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 beneficiary or estate 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.
2 key points
Use life insurance proceeds to:
- Buy out a deceased owner’s business interest
- Keep a business going if a key employee dies