original post 3/2014, updated 2/2019
Why is business partnership life insurance so important? We’re going to be focusing on business applications of life insurance through several posts and how the lack of life insurance can be a disaster and how using the wrong agent or the wrong company can be a disaster of a different color. Let’s do disaster control.
Business Partnership Life Insurance
It’s likely the first thing that comes to mind in business partnership life insurance is that used to fund a partnership buy/sell agreement, a tool designed to make sure a deceased partner’s family is taken care of without having to burden, or even liquidate the company. There are other uses of life insurance in partnerships and businesses and we’ll get to those in a minute, but first let’s talk disaster control.
The Wrong Agent/ The Wrong Company
If a business has two partners, three, or more partners, and they are all young and in good health, the life insurance for a buy/sell agreement can still be messed up if the company engages the wrong agent or the agent uses the wrong company. It can get even further off track if the attorney that sets up the legal documents for the buy/sell sends the partners off to get the insurance from whoever they want.
While I don’t necessarily recommend even a married couple get their life insurance through the same company, there are some rules if you do, including:
1. The same agent should handle both partners or all of the policies
2. If health underwriting permits, it is prudent for both or all policies to be held with one company
3. An independent agent should be used so that if health or financial underwriting is an issue you and your partners can get it right the first time
If you happen to run into life insurance health underwriting issues, known or unknown, you may need to start over. Starting over is also an option if a company fusses with you over the company financials. However, if starting over can be avoided, well, everyone has a better time.
Business Partnership Life Insurance for Bank Loans
Another use of business partner life insurance is as collateral for business bank loans. Occasionally both partners will already have some personal or business life insurance that can be collaterally assigned to the bank, but more often business partner life insurance policies are purchased expressly for this purpose so that other coverage isn’t subject to something like downgrading for the life of the loan.
As with the buy/sell scenario, here’s where health issues, known or unknown can throw a real kink in the hose if the agent you’re using isn’t an experienced impaired risk life insurance agent and/or doesn’t have a backup plan in place if a partner ends up not able to qualify for traditional life insurance. We all think we know our partners and have at least a layman’s idea of their health, but two recent instances come to mind that would throw an ill equipped life insurance agent into a tailspin.
Example #1 of Business Partner Life Insurance Gone Wrong
The first example was about a year ago when two physicians applied for life insurance as collateral for a clinic they were building. One was approved and the other was postponed due to an elevated PSA. A biopsy was done and he was then declined due to a diagnosis of prostate cancer. This was one week before the loan was to be closed. The bank wouldn’t accept life insurance on just one partner. The un-insurable business partner called and asked what could be done, if anything.
With the pathology on his prostate cancer, and the fact that he hadn’t even decided on a treatment direction, traditional life insurance was going to be a minimum of six months out, probably more than a year. I was able to secure a business life insurance policy that excluded death due to anything to do with his prostate or cancer. It wasn’t a perfect answer, but the bank accepted it and we had it in force two days before they closed on the loan – five days after he contacted me.
Example #2 of Business Partner Life Insurance Gone Wrong
The other instance was when two partners were setting up a buy/sell and were funding it with a business partner life insurance policy. This had to be awkward at best, but the business partner that called me had never shared with the other partner the fact that he was HIV positive. While he had decided it was something he should let his partner know, he was concerned because he didn’t believe he would be able to get life insurance to hold up his end of the agreement.
After reviewing his situation, it was obvious that the HIV was well controlled. And, on the anti-retroviral drugs he was taking, his viral load had been undetectable for years and we were able to get him approved for business life insurance which made the discussion with his partner go much easier.
For business life insurance purposes, don’t just run off to a big name life insurance agent. Avoid the do overs. If there is one common thing I believe all of us in business could agree on is that getting something right the first time and not having to do it twice are critical. Pulling these two above scenarios out of the fire and making them not only work, but work on time, happened because of my expertise in the life insurance business.
If you have any questions or would like to see what we can do to fix your business partnership life insurance challenges, call or email me directly. My name is Ed Hinerman. Let’s talk.