When owning a business, it is crucial to have a plan for protecting your investment. Two popular options are Key Person Insurance and Buy-Sell Agreement insurance, and while somewhat similar, they offer protection in very different scenarios.
What is Buy-Sell Agreement Insurance?
Buy-sell agreements address a company's continuity in case of a triggering event like when an owner/partner retires or leaves the company, passes away, or becomes disabled. Death is usually the most common event that owners will consider using life insurance and/or disability policies to fund the buy-sell agreements, especially for family businesses, where owners are less likely to leave. As such, buy-sell agreements are indispensable in estate and succession planning.
Notably, buy-sell agreements are often synonymous with business partnership scenarios and help safeguard partners while in partnership.
What Is Key Person Insurance?
Key person insurance is coverage that a company takes on its essential personnel. The policy's primary purpose is to protect the business in the event of the loss of a valuable employee. However, it may include a disability rider to help safeguard the company if a valuable employee becomes disabled.
What Are The Differences Between Buy Sell & Key Person Insurance?
While both buy-sell agreements and key person insurance are used to ease the shock arising from the loss of key personnel, they differ in several ways. Here are some fundamental differences between the two:
- Key person insurance is designed to protect businesses from the shock arising from the loss of valuable personnel. In contrast, a buy-sell agreement is intended to protect the interest of remaining partners when one of the partners dies, retires, or leaves the business.
- Key person insurance policies are taken on both valuable employees and executives to help shield against financial expenditures that may arise following the disablement or death of these key personnel. On the other hand, a buy-sell agreement is a legally binding agreement that allows surviving partners to buy out shares of a deceased or incapacitated partner.
- Key person insurance addresses routine business operations regarding the most valuable personnel, while buy-sell agreements address ownership of businesses when one or multiple partners die.
While they serve different purposes, key person and buy-sell agreement policies are crucial to businesses of all sizes. They make it possible for companies to continue operating at full capacity, even if a worst-case scenario happens to a key partner or employee. Considering how a key person's death can affect a business's operations, it may be in your best interest to consider both options, especially in the early stages of development.