Business Continuation Insurance

Business Continuation

Investopedia / Laura Porter

What is Business Continuation Insurance?

Business continuation insurance is a type of life and disability insurance that covers losses if a key executive, business owner or partner dies or becomes disabled.

The insurance provides funds that a business would need to minimize disruption and continue operations. It also helps businesses adopt and adhere to a specific succession strategy in the event of losing a key employee.

Breaking Down Business Continuation Insurance

There are two common types of business continuation insurance: entity-purchase and cross-purchase policies. Entity-purchase policies name the business itself as beneficiary of the policy. A cross-purchase policy covers specific individual business owners and partners, each of whom receives benefits directly under the terms of the policy.

How Business Continuation Insurance Mitigates Risk

The death or disablement of a key executive can cause stress and financial difficulties. In some cases, the lack of clear leadership can create disruption so severe the business may fail.

Business continuation insurance combines life and disability insurance, so that other partners or owners can plan ahead, knowing they can acquire the impaired executive's share of the business under a clear succession plan without misunderstandings or undue conflict over who will continue to lead operations.

Combined with clear buy-sell agreements, business continuity insurance can help businesses with multiple owners and partners maintain an orderly succession strategy. Such insurance also addresses the need to be sure that the portion of a business owned by one person can be purchased by other partners or owners. Otherwise, the ownership may be passed to a key executive's heirs.

Various forms of business continuity insurance include term life or whole life insurance policies that name specific individuals who would purchase the business as beneficiaries. Disability policies can also be used for that purpose. In other cases, the policy names a business itself as beneficiary, so the business entity can buy its own equity.

Yet it is not just the loss of an owner of a business that can cause disruption. Life insurance and disability insurance can mitigate losses for any person vital to the operation of a business, even if they do not own a share of it.

A software company, for example, might determine that the loss of a senior programmer could cause so much disruption that it is valuable to insure against the loss of their services. This type of insurance, however, does not typically come with buy-sell agreements as is often the case when insuring an owner or partner.