Business life insurance can be written for many reasons. Among the more important are:
to provide continuation of a sole proprietorship or the death of the owner, to provide
continuations of a partnership on the death of one of the partners, to provide for
reimbursement of loss and provide for a replacement in case of the death of a key
employee, and to provide funds during the period of transfer of control of sale. While no
one likes to think of such eventualities. It is the responsibility of the business owner
to anticipate such events and prepare for as little disruption to the business as possible
in the event of such tragedies.
The right insurance policy cannot only cover the dollars needed for transfer of the
firm, but it can provide the funds required to carry on the business during the process of
transferring ownership. Funds will be needed, almost immediately. There will be debts,
taxes and administrative costs to be covered. The owner’s family may need income to
tide it over the period of legal transfer. If there is no one in the family capable of
running the business, funds may be necessary to hire a general manager. If the business is
to be sold outright, working capital will be required to avoid a distress sale. The
designated purchaser, if there is one (the surviving partner or partners, employees, or an
outside interest), may need financing to cover the purchase price.
There are important legal documents needed to ensure the survival of the firm; your
attorney and insurance agent can help decide what you will need. Three key legal
agreements are a trust agreement, will and a buy and sell agreement.
- A trust agreement or will.
Either document can be used to spell out the new legal
ownership of the firm upon the death of a sole proprietor or partner. A trust agreement is
preferable, since it avoids the costs and time required for probate.
- A buy and sell agreement.
This tool should be used in the case of a partnership. In
the absence of legal safeguards, a partnership automatically dissolves at or shortly after
the death of a partner. The only business allowed is activity related to liquidation. If
the business continued, the surviving partners are liable for losses incurred should
assets not cover losses. The buy and sell agreement provides for a pre-arranged method of
evaluating the deceased partner’s interest.
To discuss business life insurance, legal protection of the business and long term
plans for business continuance, contact the SCORE Association (Service Corps of Retired
Executives). SCORE is a nonprofit, volunteer service organization that provides small
business counseling and mentoring. These services are free and confidential. For a
referral to the SCORE chapter nearest you, call 1 (800) 634-0245.
