Business protection

What happens to the business if an owner or key person dies?

A small business often depends on a few people. If an owner or key employee dies, the business can lose revenue, credit and direction at the same moment a family needs to be paid for its share. Life insurance is one tool for funding those obligations. It works alongside written agreements, which is why your attorney and CPA belong in the conversation.

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Cornerstone Capital is an independent life insurance brokerage, not an insurer. Carriers make underwriting decisions, and approval is never guaranteed. This form does not apply for coverage.

Two co-owners working together at a workbench

This page is for you if

The business has two or more owners.
Revenue leans on one or two people.
You have personally signed for a business loan or lease.

Before anything else

Questions to ask yourself

Talk these through with a broker

If you or a partner died, who would own that share of the business?
Is there a written buy-sell agreement, and is there money behind it?
Which person would be hardest for the business to lose, and what would it cost to replace them?
Have you personally signed for any business loans or leases?
When was the business last valued?
Who is meant to run the business after you, and do they know?

01The problem

A death becomes a negotiation

When an owner dies, their share of the business goes to their estate. The surviving owners now have a new partner they did not choose, and a grieving family holds an asset it cannot easily sell or run.

At the same moment the business may lose revenue, a lender may ask questions, and employees wonder what happens next. Without a plan and money behind it, every one of those is settled under pressure.

02The tool

Life insurance funds the agreement. It does not replace it.

A buy-sell agreement is a legal contract drafted by an attorney. It says who buys an owner's interest, at what price, and when. Life insurance can provide the cash to carry that contract out, so the survivors can pay and the family is paid.

The same is true of key person coverage and loan protection. The insurance supplies money at the moment it is needed. The plan for what that money does comes from your written agreements, your attorney and your CPA.

03The mechanics

How it works

Key person coverage

The business owns a policy on a person whose loss would hurt revenue or operations, and the business is the beneficiary. Proceeds may help cover lost income, recruiting and training, or obligations to lenders and customers during the transition.

Employer-owned policies are subject to notice, consent and reporting requirements. Your CPA and attorney can confirm what applies.

Buy-sell funding and partner protection

A buy-sell agreement is a legal contract that sets out what happens to an owner's interest at death or another triggering event. Life insurance can provide the cash to carry it out, so surviving owners can buy the interest and the family receives payment.

Agreements can be structured so the owners hold policies on each other or so the business holds them. Each structure has different tax and administrative effects. The agreement itself must be drafted by an attorney.

Loans and personal guaranties

Owners often sign personally for business debt. If an owner dies, a lender may look to the business, the estate or the other guarantors. Some lenders require life insurance to be assigned as collateral for a loan.

Coverage sized to outstanding obligations may help keep that debt from landing on a family.

Succession

Insurance can help with fairness in a family business, for example providing for children who are not involved while the business passes to the one who is. It can also give a successor time and capital to take over.

Choosing the coverage

Term insurance may suit needs with an end date, such as a loan or the years until a planned exit. Permanent insurance may be considered where the need is open-ended. Amounts should be revisited as the business value changes.

What you may have heard

Said often. Worth a second look.

We have a buy-sell agreement, so we are covered.

What is actually trueAn agreement sets the terms. It does not supply the money. If the survivors cannot fund the purchase, the agreement is a promise nobody can keep. The reverse is also true: a policy with no agreement behind it leaves the proceeds without instructions.

The business can deduct the premiums.

What is actually truePremiums on a policy where the business is a beneficiary are generally not deductible, and employer-owned policies have notice, consent and reporting rules. Tax treatment depends on the structure. This is a question for your CPA before anything is put in place.

Concept names decoded

The names this goes by

Names you may have heard for what is on this page. Open one to see what it is and what it does not promise.

Key Person Insurance“Insurance on our most important employee.”

What it actually is: A policy the business owns on someone whose loss would hurt revenue or operations. The business is the beneficiary.
Common policy types: Term or permanent.
What it may accomplish: Cash to cover lost revenue, recruiting and obligations during a transition.
What it does not guarantee: The survival of the business. Employer-owned policies also have notice, consent and reporting requirements.

Questions to ask

Who would be hardest to replace, and what would it cost?
Has the insured person given written consent?
Has our CPA reviewed the tax treatment?

Where this fits

Buy Sell Funding“Insurance for our buyout agreement.”

What it actually is: Life insurance used to supply the cash a buy-sell agreement calls for. The agreement is a legal contract your attorney drafts. The insurance funds it and does not replace it.
Common policy types: Term or permanent, owned by the partners or the business depending on the structure.
What it may accomplish: Let surviving owners buy a deceased owner's share and let the family be paid.
What it does not guarantee: That the amount matches the business's value. Coverage falls out of date as the company grows.

Questions to ask

Is there a signed agreement, and when was it last updated?
When was the business last valued?
Who owns each policy, and why?

Where this fits

AdvancedExecutive Bonus and 162 Bonus“The company pays for my life insurance as a perk.”

Advanced planning concept, coordinate with tax and legal professionals

What it actually is: An employer pays a bonus that the employee uses for premiums on a policy the employee owns. The name comes from Section 162 of the tax code.
Common policy types: Usually permanent coverage.
What it may accomplish: A benefit for a selected employee, with the employee owning the policy.
What it does not guarantee: Any tax outcome. The bonus is generally taxable compensation to the employee, and deductibility for the employer depends on the facts.

Questions to ask

How is the bonus taxed to me?
What happens to the policy if I leave?
Has the company's CPA reviewed it?

Where this fits

AdvancedSplit Dollar“Sharing a policy with my employer.”

Advanced planning concept, coordinate with tax and legal professionals

What it actually is: An arrangement in which two parties, often an employer and an employee, share the premiums, cash value and death benefit of a policy under a written agreement.
Common policy types: Permanent coverage.
What it may accomplish: A way to fund coverage for a key person with costs and benefits divided by agreement.
What it does not guarantee: Simplicity or a tax result. These arrangements are governed by detailed federal tax rules and need legal drafting.

Questions to ask

Which tax regime applies to this arrangement?
What does each party receive at death and on termination?
Who drafted the agreement?

Where this fits

See every name decoded

04Trade-offs

What it does, and what it does not

Advantages

Provides cash at the point a business is most exposed.
Can put funding behind a buy-sell agreement so it can be carried out.
May reassure lenders, partners and employees about continuity.
Can help keep business debt from falling on an owner's family.
Coverage can be structured around the agreements your advisors draft.

Limitations

Insurance does not replace a properly drafted legal agreement.
Coverage can fall out of step with the value of a growing business.
Ownership and beneficiary structure can create tax consequences if set up poorly.
Each insured person must be underwritten, and one owner may not be insurable on the same terms as another.
Policies need ongoing attention as owners, loans and valuations change.
Life insurance covers death. Disability, retirement and disputes need separate planning.

05Fit

Who it may fit, and who it may not

Who it may fit

Businesses with two or more owners.
Companies that rely heavily on one or two people for revenue or expertise.
Owners who have signed a personal guaranty for business debt.
Family businesses planning a transfer to the next generation.

Who it may not fit

Sole proprietors with no employees, debt or plan to transfer the business, who may need personal coverage instead.
Businesses with no written agreement and no intention to create one.
Owners looking for legal or tax structuring, which comes from an attorney and CPA.

How Cornerstone works

We are an independent brokerage, so we can look at more than one carrier, subject to appointments, product availability, licensing and eligibility. We ask about your situation first and explain the trade-offs. Keeping what you have is a fine outcome.

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Important to know

This information is educational and is not legal or tax advice. Cornerstone Capital does not draft agreements or provide tax opinions. Work with your attorney and CPA before putting any business insurance arrangement in place.

The tax treatment of premiums and proceeds in a business setting depends on the structure, the parties and current law.

Coverage is subject to underwriting. Eligibility and premium depend on age, health, financial justification and carrier criteria, and approval is never guaranteed.

The Cornerstone Journal

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Life Insurance for Business Owners: Key Person, Partner Protection and Buy-Sell Planning

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Term vs. Whole vs. Universal Life: Start With the Problem, Not the Product

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Next step

Review your business protection.

Business type, owners, the goal and whether an agreement exists. We start with the ownership and the obligations, not a product.