Life insurance on business partner not as morbid as it sounds
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People generally don't like to make out wills since that brings them face to face with their own mortality.
When it comes to taking out life insurance on a business partner, though, to ensure the future of the company in case of a death, local insurance agents say the discussions are almost never difficult.
"By the time they get to us, their accountants usually already have laid out the plans and options to them to let them know this is something they need," said
The two are in the process of securing the agreement. Kresge, 36, has had the company for about 10 years, and Metz has been a partner for about three years.
"Our families are friends, they all know each other. It just seemed like the smart thing to do," Kresge said. "I think this was easier than doing a will. We wanted to make sure our families were taken care of."
The policies are available through life insurance specialists in monthly premiums. The annual cost is about 0.05 percent to 0.5 percent of the death benefit based on gender, age and several other factors, according to
Choosing a type
There are two main types of insurance business partners take out on each other, Rutherford said.
The first is a "buy-sell" agreement, where the surviving partner receives the death benefit to buy out the deceased partner's interest in the company. The buyout is paid to a spouse or nextof-kin who would have inherited the partner's stake in the company.
"This is the one you see most often," Rutherford said. "No one wants to see their business fall apart, and in most cases, they want to make sure their spouse won't have to work after they die. This way, the spouse gets a decided-on value, and you know exactly what the heirs are going to get from the business."
The other type is a "key man" policy, which provides liquidity for the surviving partner. Rutherford says the policy is designed to keep a business afloat when one partner, who is considered the more important partner, dies.
The remaining partners could have difficulty keeping the business going without the deceased partner. The key man policy will give them somewhat of a "grace period" financially, Rutherford said, to retain clients or customers who may have dealt only with the deceased partner.
"It gives you the time to find a new employee or to change the business model or whatever needs to be done to continue the business," Rutherford said.
While most businesses have these policies, the trick is keeping them updated. Rutherford said he's heard of cases where the partners decide on a buy-sell agreement in the infancy of a company, when it has marginal value.
However, the policy is not kept current. When a partner dies, the actual value of the company is far greater than the value of the buy-sell policy. That brings the partner's heirs back to the table seeking more money from the remaining partners.
"It's a situation where your company is worth
Phillips said he's seen cases where a partner divorces and remarries but doesn't change the beneficiary information on the buy-sell agreement. In those cases, the ex-spouse will be the beneficiary, not the spouse at the time of death.
'Ducks in a row'
"It's just part of the cost of doing business," Phillips said. "You know you need auto insurance, you know you need business insurance, and you need this type of insurance to protect yourself and your business."
Kresge, who said his will be a buy-sell agreement, said that while he and Metz have taken some time before pursuing the insurance agreement, he's glad he's getting it now.
"It's just kind of getting our ducks in a row," he said. "Honestly, it's something that gets pushed off when we're busy, but we know how important it is." <
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