Business life insurance policies are common to an accountant, but I never knew the real-world application or benefit of them until recently. I got married this past summer and my wife and I started looking into life insurance policies. I asked our agent about partnership life insurance out of curiosity and realized it’s something more business owners should be aware of. You should think about safeguarding your business against the loss of an instrumental partner.
Partnership life insurance comes into play when an instrumental person, like an owner or a partner, passes away. At WHH, we primarily work with family-owned and closely-held businesses. In many cases, there are a couple of key, almost irreplaceable people in the organization. Often times, these individuals are of unique value because of what they intellectually or financially contribute to the business. If you’re worried about factors such as the future of your company, the transfer of business ownership or sustaining customer service should something happen to your “key” partner, you should consider partnership life insurance.
The concept of taking out a partnership life insurance policy is to hold a policy on your business partner and vice versa. As such, in the case that your partner passes suddenly, you could use the proceeds of the policy to purchase his interest in the business from the estate.
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Taxes
Post-tax dollars are used for all partnership life insurance policies. The premiums are non-deductible, but if you ever need to use the insurance, it’s a minor price to pay. Furthermore, collection on the partnership life insurance policy is not taxable.
Policies
There are two types of insurance and each has advantages and disadvantages. Take a look at the pros and cons to see which would be the best choice for you.
Term Fixed Business Life Insurance:
A fixed-term policy is one with a set end date. Depending on your provider, it could be as short as two years.
Pros: This is the cheaper option of the two policy types. In addition, as the plan gets shorter, the policy gets cheaper.
Cons: The premiums spent on this policy are “use it or lose it.” The premiums accumulate only as long as you are paying them. You can’t roll over the amount you’ve paid once the policy ends.
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Permanent Business Life Insurance:
Permanent policies don’t have a designated end term. In short, as long as you pay in, it’s active.
Pros: The premiums paid into a permanent policy get split into two accounts: insurance and investment. The insurance portion functions nearly the same as a fixed-term policy. As such, you need to use it or lose it. The investment portion is similar to an IRA account. You can choose which investments you’d like to spend the cash value on. In addition, you can also use the investment income to pay for your premium. Another benefit is that if you don’t use the insurance policy, you still get the investment money back upon expiration.
Cons: This is the less economical policy type. The reason it’s so expensive is that there are more options available for using funds and it has a longer policy length.
This all depends on your current situation. There are definitely options available that will allow you to set up a policy that works for you, your tax dollars and provides you peace of mind. I suggest working with both a financial adviser and an insurance agent to ensure you’re getting the best return on your investment.
By: Sergeih Khachatourian, Staff Accountant
