Starting a business partnership?

Here are the insurance questions you need to ask.

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JUNE 24, 2022
By Sylvie Tremblay

For an entrepreneur, finding the right business partner can be very gratifying — revolutionary, even.

You gain a teammate to bounce ideas off of as you grow. Plus, your business can benefit from the unique strengths and talents you each bring to the table.

That said, mixing your interests and resources with another person could be challenging. That’s why it’s important to secure your business together and ensure you’re both protected and prepared for the unexpected.

As you establish your partnership, it may help to ask the following questions. The answers you come across can help you start your partnership on a stronger foundation.

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What happens if your business partner is unable to work?

As co-owners, you and your business partner are both indispensable. But: 

  • What happens if your partner has an accident or a critical illness? 
  • What if an unexpected event leaves your partner unable to do their job?

Darren Devine is the president of Devine & Associates Financial Services Inc. “It helps if the proper business owner insurance is in place,” he says. “Then the business receives a cash injection that lets you replace that key partner in a much smoother way.”

This means you’ll have the funds to: 

  • hire a recruiter to secure a replacement
  • help cover the cost of any training needed for a new partner or employee, and 
  • have a buffer for ongoing costs — including payroll — while your business works through the transition. 

This way, you can focus on moving your business forward without stressing about your finances.

What is key person insurance?

Key person insurance is an insurance policy that a company purchases on the life of someone who is vital to the success of the business. This person may provide money to support its operation, special skills, or both. A key person may be:

  • a business owner, 
  • a partner, or 
  • an employee.

Key person insurance can be life insurance, critical illness insurance, or disability insurance. And the company is the beneficiary* of the policy and pays the premiums.*

What happens if your business partner dies?

Key person insurance helps you continue to run your business in case of an illness or accident. But, you’ll also need to protect your ownership of the business in case of a death.

Your lawyers may have already written a buy/sell agreement into your business contract. This type of agreement allows you to purchase your partner’s share of the business if they die. Depending on agreement terms, it may only outline the terms of a business sale. In this case, it doesn’t provide a source of funding for the purchase.

So what happens if you don’t have the full value of your partner’s share in your personal savings? Then you might not have the funds to buy their share when you need to. That’s where insurance comes in. “Life insurance can help to protect you, your business and your family,” says Devine. “Just make sure each partner is listed as the beneficiary.”

The right life insurance policy means you’ll have money to become the sole owner in case your partner dies. But what happens if you die? Then your partner’s life insurance policy helps them afford to buy out your share of the business. This helps your family maintain their standard of living as well. How? They can use the money from the buy out to help cover any expenses they relied on you to pay. For instance, perhaps your family depended on you to cover a portion of the mortgage or rent. Or, maybe your kids relied on you to help fund their tuition years. 

If you already have life insurance, why do you need different insurance for your business?

You may already have individual life insurance, critical illness insurance, or disability insurance for yourself. This is a great way to protect your own income and your loved ones. But, with business-owned life insurance and disability insurance you name your business as the beneficiary. That way, the business can continue if you’re disabled or die suddenly. 

Do you need life insurance for a business loan?

Are you getting a business loan? Your lender may require life insurance. One where the bank is the beneficiary to pay off the loan if a business owner dies. Ask your bank or lender for more information.

Are you and your business partner on the same page?

You and your business partner may have shared values and goals. Still, it’s important to make sure you’re on the same page about your goals and how you can achieve them. “If you want to go somewhere you’ve never been before, you need a map to get there,” Devine says. “A financial plan represents a map for the business owner.”

In the early stages, an advisor can help you create a plan that aligns with your business goals. This way, both you and your business partner will be working toward the same objectives. This, in turn, will help you work together most effectively.

Read more: Why work with an advisor 

And as your business grows, your advisor can serve as a sounding board for making more complex decisions. For example, you may want: 

“A trusted advisor can walk you through your options,” Devine says. “So you and your business partner can weigh the pros and cons as a team. This will also help you navigate the fastest, most efficient way to grow your business together.”

An advisor can help put together a solid plan that suits your goals.

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* Definition of terms:

Premiums are the annual or monthly fees you pay for having insurance.

Beneficiary: Insurance companies call the person (or persons) named on the insurance policy to get the death benefit the beneficiary. People often name their spouse or children as their beneficiaries.

This article is meant to provide general information only. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.