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A life insurance policy that is purchased for
business rather than personal use. Examples would be life insurance
purchased by a business organization on the life a key employee or
life insurance owned by one business partner on the life of another.
It is often bought by partnerships to protect the surviving partners
against loss caused by the death of a partner, or by a corporation
to reimburse it for loss caused by the death of a key employee.
A key business persons untimely death can cause critical financial
disruptions to any business. Life insurance products have been
designed to help business owners when the death of an important
person occurs. Life insurance can be used to diminish the impact of
such a death.
The most common uses for Business Life Insurance are:
Buy / sell agreements funded with life insurance.
Corporate stock redemption funded with life insurance.
Key employee life insurance.
The Importance of Business Insurance
The need for business insurance arises because the death of people
who are vital to the operation of a business can have far reaching
effects, including the death of the business itself.
The Buy/Sell Agreement funded with life insurance
Buy/sell agreements funded with life insurance become an immediate
source of money for a surviving business partner to buy the deceased
person's business interest. Life insurance policies used in this way
are also generally called business continuation insurance. The use
of life insurance in this manner helps the business to continue as
usual.
With a "partnership buy/sell agreement" any surviving partners will
purchase the portion of a business owned by a deceased partner. The
agreement includes the purchase price of the deceased person's
interest in the business. The agreement should include a guarantee
to ensure money is available at the time of loss. Life insurance is
the perfect method to guarantee availability of the money.
Cross-Purchase Agreements with Life Insurance
With the use of a "cross purchase buy-sell agreement" each partner
purchases a separate life insurance policy on every other partner's
life equal to the amount needed to buy a share of the partner's
interest at death. In a three-partner arrangement each partner would
buy two life insurance policies covering each of the other two
partners. In this manner each surviving individual partner would use
the proceeds to purchase the deceased partners business interest.
Entity Purchase Agreements with Life Insurance
With the use of an "entity purchase buy/sell agreement" the business
owns the life insurance policy on each partner. So, in contrast to
the "cross purchase buy-sell agreement", where it would take six
life insurance policies to cover the three partners, the "entity
purchase buy-sell agreement" would only require three life insurance
policies. The business would own the policies instead of the
partners, thus at the time of death of a partner the business
(entity) would pay the proceeds to the deceased heirs instead of the
individual partners.
Corporate Stock Redemption with Life insurance
Closely held corporations are much like partnerships. They have
stockholders rather than partners. With a closely held corporation,
the stock is held by a select group rather than being made available
to the public. In this case, the corporation would purchase the life
insurance policies on the lives of the stockholders and own the
policies. At the time of death of a stockholder, the corporation
would receive the insurance policy proceeds and the use these
proceeds to purchase the stock from the deceased heirs.
Key Employee Life Insurance
Business related life insurance can be written on the life of a key
employee who is vital to the successful operation of a business. A
key employee might be one of the owners, but it could be a non-owner
employee who is unique to the company. This person is vital to the
company and the company would suffer by the loss of this person. Key
employee insurance requires a life insurance policy that names the
employee as the insured and the business as the policy owner and
beneficiary. The business pays the policy premium and receives the
death benefit if the employee dies.
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