It’s a scenario that happens all too often. You and a friend or colleague start a business. You have a brilliant idea and you’re ready to take on world. You draw up a contract, split everything 50/50. The two of you pour every ounce of your talent, time and energy into the company. Things are tough in the beginning. The market isn’t ready for your idea, VCs won’t take your calls, your proof-of-concept flops, you run into trouble on the production line. Maybe you max out your credit cards to keep it going. But you are entrepreneurs. You work hard and smart. You persevere. And somewhere along the way, you catch a break. Things start to go your way. You grow the business and within a few years, you’re at a $5 million valuation.
Pop the champagne, cue the dance music!
Then the unthinkable happens. Your partner has a terrible accident and dies. On top of the emotional devastation, you now are faced with the very real possibility that the business you’ve created can’t continue because the agreement you signed entitles your partner’s spouse, child, beneficiary or estate to his share of the company.
It’s far from ideal to find oneself in business with a deceased partner’s spouse or child. The future of the company you’ve worked so hard to build is suddenly thrown into jeopardy because you failed to plan for the unexpected.
Buy-sell life insurance policies protect the continuity of a business by providing liquidity to the surviving partner or partners, enabling them to buy out the deceased partner’s share in the event of death. These policies also apply to other game-changing situations like retirement or termination of a partner.
And because it’s short-term life insurance, the cost of these plans tends to be extremely low. You might only pay $600 a year for $1 million of term life insurance. Of course, costs vary greatly depending on age and health classification. Smokers pay double the premiums of non-smokers, for example. You’ll need to understand where you and your partners fit on the table rating of structured medical risk.
Perhaps the most frequently overlooked type of buy-sell policy is disability buy-out. Statistics show that you are three times more likely to be disabled than to die prematurely. From a liquidity perspective, disability of a partner can have an even more devastating effect on the continuity of a business than death because a partner who becomes disabled continues to draw a salary and profit share, while losing the ability to contribute to the company. A partner could be disabled for life, leaving a company hobbled by higher costs and fewer human resources.
The higher likelihood of disability is reflected in the cost of buy-sell disability insurance. Due diligence in pricing out policies across the market with the most comprehensive terms is critical. Not all buy-out policies are created equal, just as no two businesses are identical in their goals and needs.
Growing a profitable business is nothing short of a miracle. It takes focus, leadership and hard work – all things well within your control. Death and disability are out of your control, but protecting yourself in those cases with insurance products is just smart business. Contact us at jbergstein@risk-strategies.com.
