Many business owners operate their business without giving consideration to how they would handle the loss of a key executive/leader should they pass. Not giving any thought to this factor, can leave your business in a financial catastrophic position should this happen.
Life policies provide business protection and assurance of continuity in times of uncertainty when key employees and/or leaders pass. However, insurance is not a "one-size fits all" product.
There are many variations of plans to consider and depending on your business situation, you must find the one that best fits your business. Similar to choosing an appropriate business structure, business owners must consider: personal goals, affordability, business value, and current age of partners/directors involved, when deciding the best way of using life insurance.
Here are some ways you can use life insurance to protect your business:
Key Person Life Insurance
When an owner, executive, manager, or director dies, a business may suffer losses due to the gap in expertise and the expense of finding, hiring and training a replacement. This type of insurance policy receives favorable tax treatment in that the death proceeds of the key employee life insurance is not taxable. However, the premiums paid by the company is NOT tax deductible.
Buy-Sell Agreements
A buy-sell agreement is a legal document that outlines how the business will continue to operate upon the death of a business owner or sole proprietor. Insurance is commonly used to provide the proceeds necessary to buy out the deceased owner’s interest in the business, thus allowing the business to continue without further disruptions. The value of such interest is determined at the creation of such agreement.
Sole Proprietors’ Buy-Sell Agreement
Sole proprietors are directly responsible for the success of the business. They also have unlimited liability with regard to business operations. Upon the death of the proprietor, family income stops and the business may have to be liquidated to pay for certain estate costs. Insurance purchased under a business continuation agreement (buy-sell agreement) can be used to keep the doors open until the business can be sold at a fair market value for the benefit of the family. It can also be used to provide funds for a competent employee or other person to purchase the business from the surviving family members.
The ultimate goal of policies for businesses is to sustain that business’ financial position so that it can continue to operate beyond the founder’s life. However, this goal is easily and often unintentionally ignored since most business owners tend to concentrate on protecting themselves from risks that deal with operating their business on a day to day basis. By protecting the business through insurance, this will allow business owners to create generational wealth by allowing their family to keep their vision alive through the continued operation of their company.
Knowing the overall financial healthy of your small business, will help you determine if you are able to make consistent, long-term contributions to a life insurance plan. Assess the financial health of your company by clicking the button below:
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