When Your Business Depends on You
Key Person Insurance & Buy-Sell Planning
By Fortis Insurance Solutions
One Plan. Four Pillars. Protect. Retire. Bank. Leverage.
Business owners spend years building something valuable.
Clients. Employees. Revenue. Relationships. Systems. Reputation.
But there is one risk that often receives far less attention:
What happens to the business if one of the people it depends on doesn't come back tomorrow?
For many closely held businesses, the loss of an owner, partner, founder, or essential employee can create much more than an emotional loss. It can immediately affect revenue, customer relationships, financing, leadership, employee confidence, and ultimately the value of the company.
That's why protecting a business should involve more than insuring buildings, equipment, and vehicles.
Sometimes the most valuable asset in the company is the person creating the value.
Two strategies business owners should understand are Key Person Insurance and Buy-Sell Planning.
They solve different problems, but together they can become an important part of protecting the business you've worked so hard to build.
The Question Every Business Owner Should Ask
Imagine that you own a successful business with a partner.
You handle sales and client relationships.
Your partner oversees operations.
The business works because both of you perform critical roles.
Then suddenly, one of you dies.
What happens next?
Can the surviving owner afford to purchase the deceased owner's share of the company?
Will the deceased owner's family suddenly become an owner?
Where will the money come from?
Could customers leave?
Could employees become concerned?
Could the business continue operating while replacing the knowledge, relationships, and revenue that person generated?
These are uncomfortable questions.
But waiting until something happens to answer them can be far more uncomfortable.
Key Person Insurance: Protecting the Business Itself
Key Person Insurance is life insurance purchased to help protect a business against the financial impact of losing someone who is critical to the company's success.
The insured might be:
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An owner or founder
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A high-producing salesperson
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An executive
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A person responsible for important client relationships
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Someone with specialized knowledge or technical expertise
In a typical key-person arrangement, the business owns the policy, pays the premiums, and is the beneficiary. If the insured dies while the policy is in force, the business receives the applicable death benefit.
That creates something businesses desperately need during a crisis:
liquidity and options.
Depending upon the circumstances, proceeds could help the company replace lost revenue, recruit and train a successor, satisfy obligations, maintain payroll or other operating expenses, address debts, or simply provide the organization time to determine its next move.
The purpose isn't to replace the person.
You can't.
The purpose is to help protect the financial value that person helped create.
Buy-Sell Planning: Protecting Ownership
Key person insurance protects the company from the loss of an important individual.
A Buy-Sell Agreement addresses a different question:
What happens to ownership when an owner dies?
Consider a business owned equally by two partners.
If one partner dies, that person's ownership interest doesn't simply disappear.
Without proper planning, the surviving owner could suddenly find himself or herself in business with the deceased owner's heirs.
The heirs, meanwhile, may inherit an interest in a company they don't understand, don't want to operate, and may prefer to convert into cash.
That can create a problem for everyone.
A properly structured buy-sell arrangement can establish in advance who has the right or obligation to purchase the deceased owner's interest and under what terms.
Life insurance is frequently considered as a potential funding source because it can create cash at precisely the time the purchase obligation may arise.
Your former business page described one common arrangement, the cross-purchase structure, in which the remaining owners purchase the deceased owner's business interest. Another approach is an entity purchase or redemption arrangement, where the company itself purchases the deceased owner's interest.
Which structure is appropriate depends upon the business, number of owners, ownership structure, tax considerations, and legal objectives.
That's where planning becomes important.
An Agreement Without Funding May Still Leave a Problem
Having an attorney draft a buy-sell agreement is an important step.
But there is another question that cannot be overlooked:
Where is the money going to come from?
Suppose an agreement says a surviving owner must purchase a deceased partner's $1 million ownership interest.
That's helpful.
But if the survivor doesn't have $1 million available, the agreement alone hasn't created the money.
The surviving owner may otherwise have to:
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Borrow the money
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Liquidate personal or business assets
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Create installment payments to the deceased owner's family
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Bring in another investor
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Place financial pressure on the business at exactly the wrong time
Properly structured life insurance may provide a source of liquidity specifically designed for that contingency.
That's an important distinction:
The agreement establishes the plan. The funding helps make the plan executable.
Business Value Changes. Your Plan Should Too.
Another mistake business owners can make is establishing a buy-sell arrangement and then forgetting about it.
A company worth $500,000 today might eventually be worth $2 million, $5 million, or substantially more.
Yet the agreement and insurance funding may still reflect a valuation established years earlier.
That can create a serious gap.
Business owners should periodically review:
What is the business worth today?
How is the ownership interest valued under the agreement?
Is the insurance coverage still adequate?
Are the ownership and beneficiary arrangements still appropriate?
Have new owners entered or left the company?
Recent federal case law has also reinforced why the ownership and funding structure of a buy-sell arrangement deserves careful legal and tax review. In Connelly v. United States, the U.S. Supreme Court addressed how corporate-owned life-insurance proceeds used in a stock redemption affected the company's value for federal estate-tax purposes.
Business succession planning is therefore not something that should be designed once and placed permanently in a filing cabinet.
As the business grows, the plan should grow with it.
Where This Fits Within the Fortis Legacy Diamond
For a business owner, the Protect pillar of the Fortis Legacy Diamond extends beyond protecting personal income.
It can also mean protecting the economic engine producing that income.
Your company may represent:
Your family's income.
Your retirement asset.
Your employees' livelihood.
Your business partner's future.
Your legacy.
That makes business continuity an important part of the larger financial picture.
And the conversation does not stop with death.
A complete financial strategy should eventually consider how the business fits into retirement, succession, liquidity, estate planning, and the owner's long-term financial independence.
Because for many entrepreneurs, the business isn't simply something they own.
It may be one of the largest financial assets they will ever build.
Two Different Risks. Two Different Strategies.
The easiest way to understand the difference is this:
Key Person Insurance
- Protects the business from losing an important person.
Buy-Sell Planning
- Helps protect the transition of ownership when an owner dies.
One helps provide business continuity.
The other helps create ownership continuity.
A business may need one.
It may need both.
But the starting point isn't purchasing an insurance policy.
It is identifying the financial risk.
What Would Happen to Your Business Tomorrow?
If you own a closely held business, ask yourself:
If I died tomorrow, could this business continue?
If you have a partner:
If my partner died tomorrow, could I afford to purchase his or her ownership interest?
And perhaps the most important question:
Have we actually put the plan in writing and funded it—or have we simply talked about it?
Those answers can reveal significant gaps.
You spent years building your company.
Don't leave its future entirely to chance.
Schedule a Business Protection Strategy Session
A Business Protection Strategy Session is designed to help identify key-person exposure, review existing buy-sell planning and insurance coverage, and determine whether your current strategy provides adequate liquidity and protection for the business, its owners, and their families.
Protect the people. Protect the ownership. Protect the business you've built.
Fortis Insurance Solutions
One Plan. Four Pillars.
Protect. Retire. Bank. Leverage.
Helping Families and Professionals Build Financial Systems That Endure.
This material is provided for educational purposes only and is not intended as tax, legal, investment, financial-aid, or individualized financial advice. Tax laws, 529 rules, FAFSA methodology, and financial-aid rules are subject to change. Life insurance policy benefits, guarantees, costs, cash values, loans, and other provisions vary by policy and insurer. Policy loans and withdrawals reduce available cash value and death benefits and may have tax consequences or affect policy performance. Consult the appropriate financial, tax, legal, and financial-aid professionals regarding your individual circumstances.