We have touched on these areas of insurance in the past, but I thought it useful to apply the theory to a real-life case study we worked on recently. Seeing how the insurance can relate to a business scenario may help you identify your own needs within a business.

When running a business with partners, it’s essential to consider the financial risks that could arise if one of you were unable to work due to illness, disability, or death. Without a solid risk management plan, your business could face financial instability, operational disruptions, or even ownership disputes. This article explores key areas of risk for business partners and how insurance policies can provide essential protection, using a real-world example to illustrate the impact of these risks.

Case Study: A Business with Three Partners/Owners
Consider a business with three equal partners, each owning one-third of a company valued at $4.5 million. Each partner also carries $900,000 in business debt. In addition to their ownership, all three are actively involved in revenue generation, making their contributions essential to the company’s financial health.
If one of the partners were to become seriously ill, disabled, or pass away, the business would face significant challenges. Let’s explore the specific risks and how insurance can mitigate them.

Understanding the Risks
1. Loss of a Key Partner Due to Illness, Disability or Death
Each business partner plays a crucial role in driving revenue and maintaining operations. If one of them were to become seriously ill or disabled for an extended period, or pass away, the business could suffer in several ways:

• A decline in revenue due to lost expertise and leadership.
• Increased workload and stress on the remaining partners.
• Potential need for hiring a temporary or permanent replacement.

In the case of our example business, if one of the partners were unable to work, the remaining partners might struggle to sustain operations and maintain profitability.

2. Unexpected Death or Permanent Disablement of a Business Partner
If a partner passes away, their share of the business typically transfers to their estate, which can create challenges for the surviving partners:

• The estate/beneficiary may not have the skills or desire to be involved in the business.
• The remaining partners may struggle to buy out the deceased partner’s share.
• Business debts could become the responsibility of the remaining owners.

For the business in our case study, the death of one partner would mean their one-third ownership—worth $1.5 million—could pass to their estate. If the remaining partners lack the funds to buy out the deceased partner’s share, it could lead to significant operational difficulties.

3. Business Debt and Financial Liabilities
Each partner in this business carries $900,000 in debt. If one partner were to pass away or become disabled, the remaining partners could be left shouldering the financial burden, putting pressure on cash flow and business sustainability.

How Insurance Can Protect the Business
1. Key Person Insurance
A key person insurance policy could provide financial protection if a business partner becomes seriously ill, disabled, or passes away. This coverage can help:

• Offset lost revenue while the business adjusts.
• Cover costs for hiring and training a replacement.
• Maintain business continuity during difficult transitions.

In our case study, a key person insurance policy on each partner would provide the business with the necessary funds to cover lost revenue and ensure the business remains stable. You could base the value of the insurance on the level of potential lost revenue over time, or perhaps on the cost to replace that person in the business.

2. Buy-Sell Insurance
A buy-sell agreement, often funded by life and disability insurance, ensures that if a partner dies or becomes permanently disabled, funds are available to buy out their share of the business. This arrangement helps:

• Prevent ownership disputes with beneficiaries.
• Ensure a smooth transition of ownership.
• Keep control of the business with the remaining partners.

For the business in our example, a properly structured buy-sell agreement would see each owner having life and total and permanent disablement insurance for $1.5 million. If any of the three suffer that life event, the insurance pays the owner/estate, which acts as consideration for their share of the company. Their share then transfers to the remaining partners.

3. Business Debt Protection
Business debt protection insurance ensures that if a partner dies or is unable to work long-term, their share of the business debt is covered. This protects the remaining partners from taking on financial burden and allows the business to continue operating without financial strain.

In our case study, this would mean that each partner’s $900,000 debt could be repaid through an insurance policy, preventing financial hardship for the remaining owners.

Conclusion
A well-structured insurance plan is essential for business partners to mitigate risks and safeguard their company’s future. Key person insurance, buy-sell agreements, and business debt protection can provide financial stability and ensure that the business can continue to thrive even in the face of unexpected events.

By proactively planning for these risks—just like in our case study—business owners can protect their investments, their families, and their business’s longevity. Think of it as a business estate plan.