Life Insurance on JV partner

[Jason Walkowicz]

I'm starting a rehab project with a new JV partner and was curious as to what the consensus is in taking a life insurance policy out on the JV partner to insure my interest in the deal since this particular property is held in their LLC name which is single member.

[Bill Gulley]

First, good thinking, it's called a key man policy and you'll need to show the insurable interest in the life insured and with his knowledge/consent and may need his cooperation for any physical if required.

But, I'd be more concerned with your security interest in the property to protect your investment, be it money, labor or both. That should be addressed in the partnership agreement.

With insurance you can arrange the purchase of the LLC or the property as a buy out upon any event of withdrawal. Insurance can fund a buy-sell agreement.

Consider too a Special; Power of Attorney and Health Directive as he may not die, there is a greater chance of younger people being disabled or incapacitated. A POA dies with the grantor.

That said, it's not that customary in small RE partnerships as there are other ways to protect you investment with liens, dissolution of the partnership requiring assets being disposed and distributed, so you can usually force sale anyway. And, if not on title you may be in a position to file liens.

If you are advancing funds, you might consider a future advance note and deed of trust and file it to perfect your interests as money is advanced in the future up to a stated amount.

Your insurance premiums for a life policy on a key man policy or held by an entity to fund a buy sell is an expense of business and is deductible, so your real cost is after taxes.

The type of policy to use I'd suggest a one year renewable term policy if you continue to do business you might look at a longer term, 5 or 10 yr policy. You really don't need a mortgage term policy designed to be reduced with a mortgage as you can obtain more coverage with a term policy that reduces on a uniformed reduction basis, a uniform decreasing term policy that will always cover any lien amount.

Another matter, if it's a long term hold, an option to purchase and or first right of refusal can be used in the operating agreement, your equity may be applied toward the purchase as it's earned and acquired through the partnership.

But, again, life coverage is rather unusual on small RE projects, but, OTH, I had a partner who was pretty healthy, my age who had diabetic not thought to be a big deal. 3 months later he was in the hospital having a foot amputated and 2 months later he had a stroke at my desk! A month later he passed away. So, you never know! :(