How Does It Work
There are many ways that life or disability insurance can be arranged. If there are more than two partners and the business is a corporation, the easiest way is for the corporation to take out life and/or disability insurance on all the partners. Essentially, the business would be the owner and beneficiary of the policies. If there is a triggering event, such as death, the death proceeds would flow into the company and it is then used to purchase the deceased partner’s business interest.
In a partnership of two co-owners, they simply take out life and/or disability insurance and name one another as the owner of each others policy.
The policy owner would use the insurance proceeds to purchase the business interest of the deceased owner’s interest at a predetermined amount. The benefit is that it provides the family of the deceased owner with cash instead of non-marketable company stock. The remaining owner is then freed up to carry on the business without the deceased owner’s family getting involved in the affairs of the business. Further, this protects the business from being dissolved upon the death of a co-owner.
Finally, the business would also have an influx of liquid income (i.e. cash) that may also be used by any remaining co-owners if the business is in need of liquidity.