The terms Key Man and Buy-Sell insurance are often used interchangeably. However, there is an important difference.

Key Man insurance is for the purpose of helping a company withstand and successfully navigate the loss of a key shareholder, executive or employee. Many entrepreneurs are critical to their company, not only from an operational day-to-day basis but more importantly in a leadership and strategic capacity. Losing this individual would be a significant blow. Insurance can help to lessen that blow and provide funds for numerous uses – keeping the company in the black.

Buy-Sell insurance provides the funds for the company to purchase shares from a deceased shareholders estate. Often dictated by a Shareholders Agreement; an important question that should arise amongst partners in a business is, “How will I buy-out my partner‘s estate if he or she experiences a loss of health or death”? The challenge is raising the necessary cash and the cost of raising that cash. Buy-Sell insurance can be paid for by the company and flow tax-free to the estate.

In looking at a $2M company, 50/50 partners could have both Key Man and Buy-Sell insurance. With $1.25M of insurance on each partner, a death of one of the partners would cause $1.25M to come into the company. Dictated by their Shareholders Agreement, $1.0M would be used to buy the shares from his or her estate and the remaining $250K would stay with company for Key Man Purposes.

As you can see, Key Man and Buy-Sell insurance each have specific roles and both are important components of an entrapreneurs overall succession plan.