When the business
depends on you.

The two distinct problems

Business owners tend to think about life insurance as one question when it is really two, and conflating them leads to gaps on both sides.

• The business problem. If a critical person dies, the business loses revenue, credit, relationships, or continuity. This is a risk to the enterprise and to everyone employed by it.
• The ownership problem. If a co-owner dies, their interest passes to their heirs. Those heirs may want cash rather than a stake in a business they know nothing about, and the surviving owners may not want new partners.

These need separate solutions, and both are usually needed. Personal coverage for the owner’s family is a third matter entirely, and it should not be quietly absorbed into either of the business policies.

Key person coverage

Key person insurance is a policy the business owns on an essential individual, with the business as beneficiary. If that person dies, the proceeds give the company breathing room, replacing lost revenue, recruiting a replacement, reassuring lenders, and covering the transition period.

Sizing it is a judgment call rather than a formula. Useful inputs include the revenue that person is directly responsible for, the cost and time required to replace them, the value of their key relationships and institutional knowledge, and any credit or contractual obligations that depend on them personally.

A point that surprises owners: this is not limited to founders. A rainmaker, a lead engineer, or the person who has held every client relationship for a decade can be equally critical. The question is not job title but what breaks if they are gone.

Buy-sell agreements

A buy-sell agreement is a contract among owners that determines what happens to an ownership interest when a triggering event occurs, most commonly death, but also disability, retirement, or a voluntary sale. It sets who can buy the interest, at what price, and on what terms.

There are two common structures:

• Cross-purchase. Each owner buys a policy on each other owner. Surviving owners purchase the deceased owner’s interest directly. Works well with a small number of owners; becomes administratively heavy as that number grows.
• Entity redemption. The business owns the policies and buys back the deceased owner’s interest. Simpler to administer with several owners. Carries different tax treatment that should be reviewed by a professional.

Which structure is right depends on the number of owners, the entity type, and the tax counsel involved. Insurance funds the obligation; it does not decide the structure.

Why the funding matters as much as the agreement

This is the part that most often goes wrong. An owner signs a buy-sell agreement that obligates the surviving owners to purchase the decedent’s interest, and then nobody funds it. When the event actually occurs, the surviving owners owe a purchase price they do not have in cash, and the agreement becomes a legal obligation they cannot meet. The family is left waiting, and the business is left in limbo.

Life insurance is the standard funding mechanism precisely because the money arrives when it is needed, in the amount agreed, without the survivors having to raise capital or take on debt. That is what makes it worth setting up properly rather than treating the agreement alone as sufficient.

Practical points owners tend to miss

• Review the agreement on a schedule. Business valuations change. An agreement funded to a 2019 valuation may be badly underfunded today, in either direction. Review after significant growth, a new partner, or a major change in the business.
• Make sure ownership and beneficiary designations line up. A policy owned by the wrong entity, or with a beneficiary designation that contradicts the buy-sell agreement, is a dispute waiting to happen. This should be checked, not assumed.
• Coordinate with your other advisors. Whether the transfer is taxable, whether a valuation formula holds up, and whether the entity structure supports the plan are questions for attorneys and tax professionals. We are licensed life insurance professionals; the insurance side is ours, and the rest should be handled by the people who do it.
• Do not let the business policy stand in for personal coverage. Proceeds paid to the company do not support an owner’s family. These are separate obligations and separate policies.

Where to start

The most useful first step is writing down what actually breaks. Which people are load-bearing, what agreements exist, what those agreements require, and how those obligations would be paid if they came due tomorrow.

Bring that to a free consultation. We can tell you what the insurance side looks like and where you need your attorney or CPA involved, and we will say plainly when a question is outside our remit.