'First to die' insurance coverage covers all company owners but pays only with the first death.
Mark T. Donohue, 30, and his partner, Keith D. Greenfield, 31, jointly own and operate Symphony Capital Management, a financial-planning business in Chestnut Hill, Mass. Since they urge their clients to set up buy-sell agreements to ensure orderly transitions when an owner in a partnership dies, it seemed only natural to institute such a plan for themselves. But the cost of purchasing individual life-insurance policies to fund their buy-sell seemed prohibitive. "It would have cost $7,500 per year for our firm to purchase two policies," says Donohue, Symphony's president.
Their solution: an increasingly popular type of coverage known as "first to die," which, in Donohue and Greenfield's case, costs only $2,612 per year for a $500,000 death benefit. It's simpler than it sounds. "A company buys one of these policies, which covers the lives of all owners, but the policy pays only once, when the first person dies," explains Kenneth Brier, a lawyer with Powers & Hall, in Boston.
Here's the logic: The insurance payoff comes when extra funds are most needed, usually to buy the deceased partner's stock. The payment goes to the surviving partner or the company. "Imagine a case of two owners," Brier says. "If the surviving partner plans to leave the company to a spouse or eventually sell off the company, then there's no need for additional insurance funds to pay for future buy-sells. So there's no benefit to buying multiple insurance policies that pay a second death benefit at a later time."
Your lawyer or accountant should be able to tell you whether this type of coverage makes sense for your company. -- Jill Andresky Fraser