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  • Writer's pictureJoel Cleary CFP®

What is Business Owner & Key Man Insurance?

Updated: Jul 23, 2021


Case Study

Business with 2 owners, John & David – 50/50 ownership


John and David are co-owners of a fast growing firm. Both have young families, and they know that their share in the business is their family’s main asset, as well as their source of income.

  • What happens to the running of the business if 1 business owner passes away?

  • What happens to the ownership of the business? How does the surviving owner payout the exiting owner’s estate & beneficiaries for their ownership stake?

People know the importance of putting wills in place to look after their families - to distribute personally owned assets, arrange guardianship of children and organise burial/funeral arrangements, but what about their business assets?


There are a number of ways to transfer business ownership between business owners, if 1 owner passes away:

  • Surviving business owner borrows money to buy out stake, either personally or through the business

  • Business sells assets to pay out exiting owner’s estate & beneficiaries

  • Business Ownership transfer can be arranged and funded with life insurance proceeds


The first 2 options are not necessarily practical, particularly when a bank/lender sees an owner/key person in the business is no longer around to keep running things; and will be less likely to lend money to the business as a result.


The third option is often the best method to fund ownership transfers, as well as the cheapest method available.


Insurance proceeds can be connected with a legal agreement on when and how business ownership transfers will take place: a “Buy/Sell agreement”


A Buy/Sell arrangement is a contract that allows the transfer of a business to remaining owners if one owner dies or suffers a serious illness/injury and is unable to stay in the business. This is often coupled with insurance policies to provide the money to buy out the departing owner’s share. This allows the remaining owner(s) to continue running the business and helps to ensure that the departing owner or their estate will be fairly compensated for giving up their rights to the business.


Under this type of arrangement, the Surviving business owner retains control of the business, and by using life insurance proceeds the exiting business owner’s estate & beneficiaries get fair value for their ownership stake. A great outcome overall.


What is Key Man Insurance?


Key man insurance can be used if the business owner is injured or ill and unable to keep running the business.


A typical situation when a business owner is out of action due to illness or injury:

  • Business customers & debtors take longer to pay (when a business owner is not chasing debtors payable), which can create business cashflow issues

  • Creditors demand loan obligations & repayments faster, which can also create business cashflow issues

  • Replacement staff (with less experience) may take longer to manage through disruption, manage inventory or face delays in delivering business goods & services

  • Who will generate revenue for the business in event of key person absence? Continue to pay staff? Keep the lights on?

A Key man insurance policy can provide the business with funds to recruit a replacement person with equivalent experience, provide a cash injection to manage business cashflow issues & keep the business running until the key person can recover and return to manage the business.


Using insurance this way can help protect your business and manage things in the event of unforeseen illness or injury.


If you would like to discuss how the above areas may fit your needs, contact us today.


Forward Path Advisory; Because the future is forward.




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