Life and disability insurance – is this an exit strategy or an entry strategy? At first thought, it may appear to be the former since you’re planning for what happens in the event of a death or serious disability. But in fact, the decision to obtain life and/or disability insurance for your company is anentry strategy in the sense that this is something you need to do at the beginning, not when it’s too late.
For best results, make this decision part of the drafting process for your shareholder agreement.
No Insurance = No Order
Isn’t this the way insurance companies want you to think about the situation? Long lives the debate of whether or not buying into insurance is the right decision. Some argue the fact that paying into the “possibility” of an unfortunate outcome may not be good business. But let’s think about the other side of the equation: you and your business partner do not have life or disability insurance and one of you dies. It isn’t difficult to imagine the upheaval when the appropriate systems and levels of protection are not in place.
Particularly for businesses that have borrowed extensively in the past or that are currently operating with a significant debt load, if one partner dies or becomes permanently disabled and unable to work in the same capacity, insurance can solve a number of problems and make succession arrangements more efficient.
A Business Roadmap
Insurance gives you an opportunity to make sound plans for the future of your company.
In the absence of life insurance, you might ask yourself: does the deceased partner’s spouse become part of the business or is he or she compensated on a payout schedule? How will the surviving shareholder pay for the acquisition? Without life insurance, a typical payout schedule can take anywhere from 5 to 10 years. With life insurance, you decide what happens if a death occurs. A company life insurance policy can pay spouses immediately, in which case the business carries on. Or, spouses can join the company and the insurance policy can be used to pay down debts or fund the business.
Now let’s say your business partner becomes disabled and cannot continue working. He or she still must be paid a salary and yet you need to continue the business in a feasible and sustainable manner. You likely cannot take on the work of two and yet you – and your clients – have likely come to rely on a certain volume of business. Business disability insurance provides you with the funds you need (or at the very least, helps to bridge the gap) to pay your partner a salary and to assist you in the process of hiring a replacement.
A Little Money Today, is Peace of Mind Tomorrow
For your protection and that of your family, life and disability insurance can provide tremendous relief now and in the future. You can rest assured knowing that even in a worst case scenario, your family will receive the compensation they deserve quickly, and your business partners can continue earning a living and running the company you worked so hard to build.
Not sure where to start? Consider using the services of a corporate legal advisor you can trust.