The last part of this blog series talks about life insurance and your business, including key person life insurance. This is just a quick overview of the topic, and more details can be found with your life insurance agent. Even if you are not a business owner, it is great to be exposed to this information.
Interested in the other four parts of this blog series? Here they are!
- Do I Need Life Insurance?
- How Much Life Insurance Should I Buy?
- Which to Buy? Term vs. Perm
- How Long Should My Life Insurance Last?
What Does Life Insurance Have to Do With My Business?
As with any family, a death can have major consequences with a small business. Whether you are the sole owner, a partner, or in a key management position, it is a good idea to consider having a plan in case of your sudden death.
The death of an owner or partner means that a lot of hard work and knowledge has just been lost. Ownership of the company, day-to-day operations, and debt become huge issues for the family as well as the rest of the employees or owners.
What Can I Do About It?
As a business owner, there are three common ways to structure life insurance to ensure that your death is not the death of the business.
- If you are a sole owner, an individual life insurance policy may be the best option. With the business as a beneficiary, you could help to pay off the company’s debt and/or give enough capital to keep the business running while a replacement is found.
- Business partners could consider a cross purchase agreement. All partners buy life insurance policies on all the other partners in order to buy out the deceased partner.
Example: Owner A buys a life insurance policy on Owner B, and Owner A is the beneficiary. If Owner B passes away, the life insurance payout that Owner A receives helps to buy Owner B’s share of the company from Owner B’s family.
- Business partners could also consider an entity purchase agreement. This is very similar to the cross purchase agreement except the business is the beneficiary of the life insurance policy.
Example: A life insurance policy is bought for Owner A and Owner B, and the beneficiary is the business, Acme Anvils. If Owner A or Owner B dies, the business receives the payout and can buy the company shares that either family inherited.
How Much Life Insurance to Buy?
This is very difficult to answer and should be decided on a case-by-case basis. However, you may consider entering into a buy-sell agreement.
A buy-sell agreement commonly uses life insurance to buy the deceased owner’s share, and it is very important that these agreements are looked at each year. As the value of the company changes, it is imperative that the life insurance benefit is enough to cover the value of the deceased partner’s stake.
How About Key Person Life Insurance?
Every business has one or more employees that are very important. They might be the heart and soul or the rainmakers for the company, but they are not owners in the business. In this case, losing great talent can be a real hit to any company.
Buying a life insurance policy for key employees means that a sudden death brings in cash to the company. This helps to cover any revenue they would have brought in and helps buy time until a replacement (or two) can be found.
We cannot predict the future, but we can prepare. Think about if you woke up tomorrow and your partner or a key employee was killed in a car accident. If that thought makes your heart skip a beat, call an insurance agent and start asking about life insurance for your business.