Over the course of my career, I’ve successfully exited two partnerships. One of these partnerships was with my brother.
We ran a thriving Insurance Brokerage together. We knew how important it was to get the right business protection in place. And so, my brother and I got around to the difficult conversation that so many business partners don’t want to have:
‘What happens if one of us passes away?’
The Loss of a Business Partner
Let’s take an objective look at that question. What does happen to a business partnership when one of the partners passes away? What happens to the deceased partner’s shares?
Typically, these shares get passed on to the partner’s spouse or next of kin. Which leads to the next question: Does the surviving business partner want to be in business with the deceased partner’s heirs?
In the case of our partnership, my brother and I were clear on each of our skills, strengths, and weaknesses. We each brought a specific value, experience, and expertise to the table.
Our spouses or next of kin weren’t in the financial services sector, and did not have those skills.
Our goal then was to facilitate a transfer of shares in a way that worked for both parties: The surviving business partner as well as the deceased partner’s heirs.
That’s where Partnership Insurance comes in.
What is Partnership Insurance?
Partnership Insurance is a specific type of business protection insurance structure. It provides liquidity to a business to buy the deceased partner’s shares from their next of kin.
How Does Partnership Insurance Work?
A Partnership Insurance policy is bought by the business and lists the business as the beneficiary. If one of the business partners were to pass away, the policy pays out a large lump sum of cash to the business.
The surviving partner would then use that sum to buy the deceased partner’s shares from their next of kin. This works two ways. The deceased partner’s heirs would receive everything they are owed. The surviving business partner would continue to run the business as they see fit.
Neither the surviving partner nor the heirs of the deceased partner would have to work together or get ‘stuck’ in a business partnership they don’t really want to be in.
Partnership Insurance For The Family Business
For a family business, this is an even harder conversation to have. You face not just the possibility of the loss of a business partner and perhaps a friend, but also a loved one.
Hard as it may be, it is still an imperative conversation for family members who are running a business together to have.
The advantages are all-around. The heirs of a deceased business partner have the chance to opt-out of the business. And they would be able to do this without any loss of their inheritance.
And the surviving family members who are a part of the business would have a much-needed safety net to help pull the business through what is likely to be a difficult time.
Another layer of business protection for family businesses is the Key Person Insurance policy. But I’ll save a deep dive into Key Person Insurance for a future article.