There is some confusion about what difference there is between life insurance for a business owner and key person insurance, and this key person is often the business owner. Business owners therefore often wonder if they should subscribe to one or the other kind of insurance policy - or if they should subscribe to both.
Either way, life insurance will very often be connected to a business owned by the life insurance policyholder. Suppose the business owner has accumulated a huge pile of debts during his or her lifetime. When the business owner passes away, his personal assets will be used to pay for these debts. And what may be the main personal asset? His share in the business. Faced with an emergency, and pushed to do whatever it takes to sustain his or her living, the spouse or husband of the business owner will have every right to sell the stake in the company in order to honour the debts - even if this stake is sold at a huge discount, as is often the case in such situations. Without this capital, or without the cash needed to buy out the spouse, the business may simply collapse.
Life insurance is therefore a wise strategy to protect a business against the wrongdoings or weaknesses of the business owner himself.
Another solution is to organise a buy-sell agreement, which is a contract designed so that the share the deceased has in a business will be bought at a predetermined price, through life insurance. This protects the business from taking ownership of a business following the death of the owner.
But in many other situations, key person insurance should be preferred to life insurance as it is directly subscribed by the business, not the key person, and directly benefits the business, not the key person.
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