The death of a business partner — often a family member — can devastate a small business. The loss could end operations if the last owner, partner or key person is gone. Planning can go a long way toward easing the effects, however.

Earlier columns addressed the need for succession planning as well as the use of term life insurance as a funding mechanism to ensure the continued viability of a business.

Other life insurance options could provide more flexibility with a longer horizon at an affordable cost.

First-to-die life insurance is just that — it pays at the death of the first insured person. There are two or more people on one policy. The underlying cost of this type of insurance is based on a combination of factors that includes the ages of the proposed insureds, their health, whether or not they smoke and such lifestyle hazards as skiing or racing. Generally, the oldest person or least healthy person will be the driving factor in the cost of the policy.

The advantages to this type of business life insurance include:

Immediate payment at the death of the first person who dies. This provides the cash a business needs to keep going, hire assistance or dissolve in an orderly manner — all while continuing to pay employees and expenses and meet business commitments.

Cash value accumulation. This could be a useful asset during normal business operations since it potentially could be borrowed against for business needs and built to a great enough value to help pay policy premiums.

It’s generally significantly less expensive and much less hassle that buying multiple policies — one for each person insured.

Unlike term life insurance, the policy should last with known premiums and benefits as long as premiums are paid on time and in full.

Some policies could continue after the death of the first person. This continuation will come at a cost — generally higher premiums — but might remain unaffected by changes in health.

Second- (or last-) to-die life insurance covers two or more people on one policy. Unlike first-to-die life insurance, benefits are generally not paid until the death of the second person if only two people are covered or the last person for three or more people. The same factors as those for first-to-die life insurance influence cost. By by not paying until the last insured person dies, the cost reflects the youngest and healthiest person rather than the oldest and least healthy person. These policies can be reasonably priced — often less than multiple term life insurance policies — with guarantees and cash values. 

Since this type of policy doesn’t usually pay any benefits until the final insured person dies, its main value is realized in estate planning. The payout can be used to provide heirs with the value of their share of the business if the business is to be dissolved or sold or enable a chosen successor or successors to buy the business from heirs. 

The advantages to this type of business life insurance include:

A lump sum payment at the death of the last person covered by the policy.

Reasonable premiums. Since nothing is usually paid until the final insured dies, premiums remain low.

Cash value accumulation. Again, this could be a useful asset during normal business operations since it potentially could be borrowed against for business needs and built to a great enough value to help pay policy premiums.

The policy should last with known premiums and benefits as long as premiums are paid on time and in full.

The only restrictions on the number of people to be insured are the limits imposed by insurance companies.

Disclaimer: Buying life insurance can be a complicated process involving considerations beyond those mentioned in this column. This column isn’t intended to offer financial, insurance, legal or tax advice. Consult the appropriate professionals for assistance and expertise with these and other decisions.