Being in my third decade of life insurance sales, I am still amazed how many partnership businesses don’t think about life insurance. At least some go to the trouble of hiring a good attorney to write the partnership contract. The attorney almost always suggests key man life insurance or a buy sell life insurance for this agreement. The partners then, by my experience, both procrastinate and don’t start the process. Or out of fear, believe the business cannot afford it at start up. This is a huge mistake. Let me tell you why.

First, the definition of key man life insurance or key woman life insurance is a life insurance policy usually a large term life insurance policy that covers an important or key person in the business. This is not necessarily used in partnerships but it can be. The business has an individual that is so important to the business that upon sudden death the business would suffer. Usually the business is the beneficiary. This money is used to keep the business going while recruiting a replacement. This term is misused a lot with partnerships.

A Buy Sell life insurance policy by definition is a policy that is used in a partnership agreement that upon sudden death of a partner the beneficiary, usually said partner’s family is “bought out” of their portion of the business. Most often the amount of life insurance purchased should equal a partner’s share of the total worth of the business. For example, if two partners own a business with a value of $1,000,000 then each partner should carry $500,000 in life insurance to “buy out” the other partner. This way the partner’s family is compensated for their value of the business and the remaining partner or partners now own the business.

The down side to not having buy sell life insurance in place is that the suddenly deceased business partner’s family now owns the partners share of the business. You may absolutely love your partner and his family. But do you really want your partner’s spouse and children running the business with you? Without something like buy sell life insurance in place, your new business partner will be their spouse.

Finally, how affordable is buy sell life insurance? In most cases the best option is just 10 year term life insurance policy which is the most affordable of term insurance. My thoughts behind that are the business is growing and changing through the years. If a two person partnership is worth $500,000 this year and both partners purchase $250,000 10 year term life insurance each that would be sufficient. If in 6 years the business is now worth $1,000,000, the $250,000 in proceeds would not “buy out” a partners family and the business would have to payout additional $250,000 cash to the family. I recommend having a good experienced life insurance broker involved to review your policy on an annual basis to avoid a conflict.

“Keep away from people who belittle your ambitions. Small people always do that, but the really great make you feel that you, too, can become great.” – Mark Twain

Image by at  David Castillo Dominici  www.freedigitalphotos.net

Tim Wilhoit is owner/principal of Your Friend 4 Life Insurance Agency in Nashville, TN. He is a family man, father of 3, entrepreneur, insurance agent, life insurance broker, salesman, sales trainer, recruiter, public speaker, blogger and team leader with over 26 years of experience in sales and marketing in the insurance and beverage industries.