If you're in or are considering a partnership, I urge you to give thought to a buy-sell agreement ahead of time.
Few business endeavors encompass greater challenges than partnerships. In my 30 years in the business world, I've seen more than my share of partnerships go bad. It can be especially ugly when the partnerships include family members. It's why I do my best to assist those that are in or are considering a partnership to consider all possibilities, including management, growth, and buy-outs.
Once in a while, a partnership will work out and the partners will find the synergy required to burst their business prospects much higher due to the total being greater than the sum of the parts.
One thing that's always, or nearly always worse than a partnership gone bad, is if one partner dies (or becomes disabled, divorced, or retires which I'll discuss in another piece) and the other partner(s) have to carry on with full responsibility to the missing partner's estate. It's not uncommon for two partners to get along just fine, albeit at the same time, one or more of the partners cringe at the thought of having the spouse as a business partner. A spouse or children of a partner that has untimely passed may have a very different view on how things should be run.
Plus, a surviving spouse may have financial needs that weren't expected. Needless to say, it's clear that if a partner passes, the surviving partner may have new and intense frustrations that they never expected.
By using a proper and well planned buy-sell agreement upon the death of a partner, the surviving partner can avoid many pitfalls that would otherwise ensnare the partner. If you and/or your partner isn't in a financial position to buy the business equity without notice, using a first-to-die life insurance policy may allow the surviving partner to buy out the spouse/children at any time and not cause a cash-flow or capital.
With a whole life first-to-die policy, business partners may be able to lock in a set annual premium cost, thereby allowing for easy budgeting, and the cost is typically much lower than two separate policies.
A whole life first-to-die insurance policy is typically a policy that covers two lives, and the policy pays a death benefit for the first person to die, and at the time of the first person's death benefit is paid, policies typically end unless otherwise specified.
If you would like more information on buy-sell agreements and or how life insurance can fund or help fund a buy-sell agreement, please feel free to email or call me.
Some typical advantages of some whole life first-to-die life insurance policies over term life insurance:
Level premiums and guaranteed death benefits
Growth – Very helpful as a business increases in value
Ability to stop premiums – As the policy gains in value, the partners may elect to forego a payment or sometimes multiple payments when appropriate due to cash flow fluctuations.
Self-completing policy – Whole life can often be written to become self funding at or near retirement age.
25-35% savings over two whole life policies – First to die policies usually are much lower cost than two separate whole life insurance policies.
Continued insurability – Some first-to-die policies allow for the second person to continue having life insurance protection after the first person passes, albeit at a lower death benefit amount.
Advantages of using two term life policies to fund a buy-sell agreement:
Usually lower cost than a first-to-die whole life policy
Can be tailored to have to different death benefit amounts
Can have two different term lengths