Generally, the legal entity of a partnership dissolves when one partner dies. However, partners may enter into an agreement during the life of the partnership to enable the surviving partners to continue with the business when one partner dies. A life insurance policy may be an appropriate means of accomplishing this purpose.

To be entitled to receive life insurance proceeds, a beneficiary must have an insurable interest in the life of the insured. An insurable interest is usually found where there is a blood or marriage relationship between the beneficiary and the insured or where the beneficiary has a direct or contractual relationship with the insured. Thus, a partnership and its partners normally have an insurable interest in the life of each partner.

The life insurance policy for the benefit of the partnership may be structured in several different ways. It may be a policy of joint life insurance, or a policy may be taken out on the life of each partner. The partnership itself could also be named as the beneficiary without listing the partners' individual names. The policy could be made payable either to the deceased partner's widow or his estate as full payment of his share of the business. On the other hand, it could be made payable to the surviving partners, who would then use the proceeds of the policy to purchase the deceased partner's share. The policy could also utilize a combination of these approaches.

The existence of an insurable interest may cause issues to arise if a partnership is discontinued in any way. Some courts hold that an insurable interest need only exist at the time the policy of insurance is taken out and that a subsequent loss of insurable interest does not prevent the partnership from collecting the proceeds. However, other courts find that the insurable interest terminates upon the dissolution of the partnership and that the proceeds are payable to the estate of the deceased partner rather than to the partnership.

Disputes may arise between the partnership and the deceased partner's widow as to entitlement to the life insurance proceeds. Generally, the proceeds are partnership property if the partnership paid the premiums of the policy. However, if the widow was named as the beneficiary, the partnership's payment of the premiums may not entitle it to the proceeds. If the partnership was intended as the beneficiary, it may recover the full amount of the proceeds and not merely the proceeds required to discharge the deceased partner's share of the partnership's debts. If, on the other hand, the widow is named as the beneficiary so that the surviving partners may take the business upon the deceased partner's death, the deceased partner's share of the debts will not be deducted from the policy proceeds.

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