When a business has two or three owners, they rarely stop to think about what happens if one of them dies unexpectedly. The heirs – often the surviving spouse or the children – become co-owners overnight in a company they do not know, do not run, and one where the other owner may not necessarily want to keep working with them either. Co-owner – or business-partner – cross-life insurance offers one possible, plannable financial answer to this situation.
- The essence of the arrangement: a term life policy is taken out on the life of each co-owner, with the beneficiary typically being the other owner or the company itself.
- The goal is to have funds available so the surviving owner can pay the deceased's heirs for the ownership share – instead of everyone being forced into joint ownership.
- The contractual and tax structure requires input from a lawyer and an accountant: this is not a simple insurance purchase, but the financial backbone of an ownership agreement.
How is this different from key-person insurance?
Key-person insurance addresses the risk of the company losing a critical specialist – the payout then serves to bridge operations for a transitional period. Co-owner cross-life insurance answers a different question: not one of doing the work, but one of ownership. Who continues to hold the ownership share, and who pays the heirs for it? Both can be relevant in the same company at the same time, but they solve two different problems, and in practice it is worth thinking them through separately.
How is the structure built?
In the most common setup – this is where the "cross" in the name comes from – each co-owner takes out term life insurance on their own life, with the other owner or owners as beneficiary. In some cases the company itself is the policyholder and the beneficiary instead, and the payout is used, as set out in the ownership agreement, to buy out the ownership share. The sum assured is typically matched to the estimated value of the ownership share, and this needs periodic review – on new investment, growth, or another change in value – much as sums assured for family purposes are also worth reviewing at each major life event.
What does it solve, and what doesn't it?
The arrangement provides the financial backing for a process agreed in advance – but the existence of that agreement is itself the decisive element. The insurance on its own does not settle whether the heirs are obliged to sell the ownership share, or at what price: that needs to be set out in the articles of association or a separate ownership agreement, with a lawyer's involvement. What the insurance adds to that existing agreement is the cover, so that when the situation arises, the sum does not have to be raised from a loan or from the company's working capital.
The legal and tax side: working together with the lawyer and the accountant
The policyholder–insured–beneficiary role split and the tax treatment of the payout depend on the structure chosen, and this is typically an area where involving a lawyer – to draft the ownership agreement – and an accountant – for the tax treatment – is essential, even before signing. More on the basics of the roles: policyholder, insured, beneficiary; on general tax and duty questions: this article.
With three or more owners
With two owners, the role split is simple: one takes out term life insurance on the other's life – with the other's written consent – and vice versa. With three or more, the cross-structure becomes more complex – in that case it is more common for the company itself to be the policyholder and the beneficiary under a shared arrangement, from which the surviving owners buy out the deceased's heirs in proportion to their stakes. This too is a decision for the ownership agreement: what the purchase price is based on, how it is split among the remaining owners, and what happens if a new owner joins or someone exits in the meantime.
When is it worth thinking this through?
Primarily where the owners are not close family members, and where, from either owner's point of view, running the company is not independent of how the other one thinks about the position of their heirs. The earlier the topic comes up – ideally already at founding, or when a new co-owner joins – the simpler underwriting tends to be too, since for younger, healthy owners this is typically a smoother process than years later, once health has already changed.
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