In our work with several Searchfunder clients, it’s been a challenge for them to get their arms around spending anything for life or disability insurance and I think the primary objective has been that they don’t know anyone their age who has died or been disabled, though more often than not, they actually do, they’re just not (surprise!) highly visible. Actuarially, however, the odds of either of these unfortunate events is greater than several of the risks which they insure against without thinking and could be more important to their business’s continuation if they occurred.

There are two types of coverage which we routinely recommend for new business owners' consideration, both variations of life insurance. One is so called "Key Person” which is to indemnify the business itself, and it’s investors, in the event of the untimely death of one of the people critical to the business’s success. The business is typically the owner and beneficiary of a "term" life insurance policy which usually costs around $350-$650 per $1,000,000, annually. These policies generally have a level premium for the “term” of 10, 15 or 20 years, after which the cost goes up if it’s still needed.

The other is coverage for the purpose of buying out the interest of a principal who dies unexpectedly. In this case, if there are two Searchers who are partners and one dies, leaving their interest either to a spouse, their parents (if they don’t have a will) or their estate, according to a so called “Buy/Sell Agreement”, the life insurance benefit is paid to the remaining principal or the business which in turn pays the deceased’s spouse, parent or estate, in return for their interest. This is generally already addressed in the LLC operating agreement or other corporate docs but there is almost never any funding apparatus, hence the life insurance. Without the life insurance, buying out the deceased interest becomes an extremely expensive proposition because, presumably, that partner was an essential part of the company’s value proposition and any large amount of cash on the balance sheet is not sitting there for this purpose.

Both of these types of coverage provide for the remaining partner or investors to maintain control either of the business ownership or destiny or both. If the principals are healthy, policies tend to be extremely inexpensive and worth locking in at younger ages.

Jamie Bush is the founder of Bush & Company, a 40 year old multi client family office specializing in serving small and medium size, multi generational, businesses. 

Drake Richey is a former SVP in Public Finance at Wells Fargo and is now a principal of Bush & Company.