If you own a business with others, you rely on each other to perform necessary work, make critical decisions, and contribute financially. If you become too disabled to work and participate in the business, you may be unable to contribute physically, mentally, or financially. The same is true if you pass away unexpectedly. Insurance helps people manage risks, including the risks of running a business with others.
Both insurance types should be part of an ownership agreement between co-owners. They should have a buy-sell agreement, a legally binding contract that spells out what will happen to a co-owner’s ownership interests if one dies, becomes disabled, divorces, or leaves the business. Insurance proceeds can buy the ownership share of the party too disabled to participate in running the business or who passes away. Our friends at Focus Law LA discuss insurance options below.
Disability Insurance
Disability insurance can protect you and your business if you cannot work due to a disability. You have many options, and you may want more than one.
- Individual
You buy this policy which partially replaces your income if an illness or injury prevents you from working. It may cover up to 60% of your lost salary.
- Overhead Expense
This is to pay business overhead expenses, such as utilities, rent, employee salaries, and taxes.
- Buy-Sell
This policy provides funds to allow your company to pay your salary or to buy out your ownership share if your disability is permanent.
- Bank Loan
This is also called credit disability insurance. It will make payments for a loan or line of credit for a given period.
- Key Person
This helps your business offset the financial burden of losing a key contributor (like you). Your company pays for and owns the policy and it’s paid the benefits.
Life Insurance
The co-owners buy policies insuring each other. If one dies, the proceeds are used to buy that person’s share from their estate per the buy-sell agreement. This could prevent many problems with an owner passing their ownership interest through a will or intestacy.
If that happens, you may unwillingly have new partners (like the deceased’s surviving spouse, kids, or former home health aide) with little knowledge or skill needed to help run your business. Or those who inherit the ownership share may sell it to someone you don’t want to be part of your business.
The business could also buy a “key person” life insurance policy that covers a co-owner. If that person dies, the money it provides could fund an ownership interest purchase agreed upon in the buy-sell agreement.
Insurance protects small business owners from risks that can derail their companies. Disability and life insurance are essential parts of your overall insurance strategy. Talk with your agent, broker, or corporate transaction lawyer about your needs and how they can be met.
