Business Continuation Insurance Details

Business continuation insurance protects a company against financial risks and also assists with business succession planning. As a blend of life and disability insurance, it supplies funds that companies would need to continue operations in case the owner cannot run the company. Furthermore, this insurance helps businesses implement a succession strategy if they lose an essential employee (also known as replacement planning) to assign leadership roles to a staff member(s)).

This type of insurance combination (death and disability) helps the owners and partners of a company plan their business strategy. It allows them to establish a precise succession plan ahead of time and, therefore, avoid potential conflicts and misunderstandings over how the business operations will proceed in case of a partner's death.

Many types of business combination insurance contain whole life or term life insurance policies that name directly the individuals who will obtain the business in case of an owner's death. A whole life insurance policy covers the insured person during their entire life, without an expiring date or age limit. In contrast, the term life assures the payment of a declared death benefit to the insured's heirs, but only when the death occurs within a specific term established in the policy. This scheme can also be applied for disability.

Example of Business Continuation Insurance

When a high-executive or partner of a company dies, it can be stressful for the other partners and key executives if the firm is not prepared. On the other hand, when a company holds a business continuation insurance policy, this situation will be covered ahead of time. The policy will contain the next steps the business will take after the executive's death or disability.

For example, if partner X of Z company suddenly dies or becomes disabled, but Z company holds a business continuation insurance policy, this policy will say who will assume X's position from that day on. Also, it will clarify how their shares will be divided among the other partners and any other important issues considered important by Z company and covered by the policy when partner X was still alive.

Types of Business Continuation Insurance

A business continuation insurance policy is payable according to three main ownership transition contracts including:

  • Buy-sell agreement: specifies how a partner's ownership of the business will be redirected in case of their death or disability. It frequently defines that the accessible shares will be sold to the other partners.
  • Entity-purchase agreement: a policy that nominates the own business as its beneficiary. In the event of death or disability, the company's entity is allowed to buy its equity.
  • Cross-purchase agreement: a piece of evidence that confirms the purchase of a partner's share by the other partners and/or shareholders in case of their death, retirement, or disability.

Business Continuation Insurance vs. Business Interruption Insurance

Business continuation insurance can be mistaken for business interruption insurance, which has an entirely different meaning. Business interruption insurance covers business income lost due to physical damages, such as a fire or natural disaster.

Business interruption insurance is not sold separately and can only be acquired when already included in a comprehensive package policy (for instance, automobile insurance protects your car from reasons other than a traffic accident) or a casualty/property policy. This insurance coverage includes payroll, loan payments, taxes, moving to a temporary place, and operating costs.