Starting a Business With a Partner? Here's Why You Should Each Buy Life Insurance

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  • When two people start a business together, they're taking on joint financial obligations.
  • It's a good idea for each partner to buy life insurance.
  • A life insurance policy could prevent a lot of problems if either partner passes away.

Life insurance is important even in situations where it's not providing for family members.

Most people think of life insurance as something to buy to provide financial protection for a spouse or other family members.

But when two individuals start a business together, it may be a good idea for each partner to purchase a life insurance policy and name the other as the beneficiary.

Here's why purchasing life insurance under these circumstances could be an important step to take to protect each partner's financial interest as well as the future of the company.

Why buying life insurance can be important for business owners

There's a simple reason why each partner may wish to consider buying life insurance when starting a business, and naming their co-founder as the beneficiary of the death benefit.

See, if one business partner passes away, the other likely will want to keep the company operating rather than shut down. But the deceased person will obviously have an ownership interest in the company as well. And that deceased business owner may want to make sure his surviving family members get their fair share of value out of the company he started.

Now, the surviving partner may not necessarily want the deceased person's family members actively involved in business operations or want them taking a cut of business profits without being actively involved. In fact, the best situation for everyone may be for the surviving partner to buy out the deceased person's interest in the company.

With this approach, the surviving partner can continue to run operations as they see fit without the ongoing involvement of the family of the deceased. The family can get their money upfront without having to manage or monitor a company they may not know much about or may not have a lot of interest in becoming involved in.

The issue is, the surviving partner may not have the cash to buy out the deceased person's ownership interest -- at least not without draining the company of assets and affecting its future performance. That's where life insurance comes in. The death benefit could be paid out to the surviving business owner and the proceeds could be used to buy out the interest of the partner who has passed away.

If the policy was large enough to buy out the interests of the deceased person's family and provide some continued operating capital, it could also give the surviving partner a little bit of a financial cushion until they can replace the services provided by their deceased partner and get back up to full operations again.

Think about succession planning issues when starting a business

Any business owner who is starting a company with others should think carefully about what can and should happen in case one of the co-founders passes away.

When considering this issue and making a plan for continued operations, they'll often find that purchasing life insurance is the best and most effective way to ensure the business can continue -- and everyone's surviving family members can be appropriately compensated -- in case of an untimely death.

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