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.
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.
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.
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:
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.