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. Today we’re talking business partnership life insurance. Probably the first thing that comes to mind for most is life insurance 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 get back to disaster control, part 2.
If a business has two partners, or three or more 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 the tracks if the attorney that sets up the legal documents for the buy/sell sends the partners off to get the insurance from who ever they want. While I don’t necessarily recommend even a married couple get their life insurance through the same company, there are some compelling reasons or rules for at the very least 1. The same agent should handle both partners or all of the policies and 2. If health underwriting permits it is prudent for both or all policies to be held with one company and 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. Starting over is an option if you happen to run into life insurance health underwriting issues, known or unknown, and starting over is an option if a company fusses with you over the company financials, but when starting over can be avoided, well, everyone has a better time.
Another business use of life insurance for partnerships 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 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 1. An experienced impaired risk life insurance agent and 2. 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.
The first was a few months 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 uninsurable 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. Not 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.
The other instance was when two partners were setting up a buy/sell and were funding it with life insurance. 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 antiretroviral 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.
Bottom line. For business life insurance purposes, don’t just run off to your State Farm or New York Life agent. Neither of them could have pulled these scenarios out of the fire and made them not only work, but work on time. 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. If you have any questions or would like to see what we can do to fix your business life insurance challenges, call or email me directly. My name is Ed Hinerman. Let’s talk.