Business Life Insurance is an Investment

Being caught without insurance can lead to severe consequences. Most liability coverage protects the policy owner from paying court costs and huge amounts from lawsuits. Lawsuits can lead to an award of millions of dollars to an offended party. You may also have to pay out of pocket for repairs to building and surrounding structures, cars and other property damage.

Most importantly, not having insurance policies such as auto, commercial liability and professional indemnity can be against the law in your state. The insurance costs come in addition to paying any lawsuits and damages that you might be responsible for.  Most businesses cannot survive the death of the principle owner and is an area that all businesses should consider.

Business Needs for Life Insurance include:

• Key Person – A life insurance policy may be used to help protect a business from the loss caused by the death of a key employee or owner. What would you do if one of your key employees — a top salesperson, manager, partner or product developer — suddenly died or became permanently disabled?   Would the business be able to continue without that valuable person?   
• Business Continuation – Life insurance may be used to help fund a buy/sell agreement or stock redemption plan. To preserve the future of your business, it is important that your create a business continuation plan. Such plans often include a “buy-sell” agreement. A buy-sell agreement, funded by life insurance and written while the owners are alive, ensures that your heirs can sell their share of the business to surviving owners – and that the surviving owners can buy their share.
• Business Loans – Life insurance purchased on a key employee or business owner may be used to help pay off the debts of a business. When a business takes out a loan to start or expand operations, the lender will often times ask for the borrower to buy a life insurance on their life and assign the lender as beneficiary. These policies are usually term policies that are scheduled to run the length of the loan, but all situations are unique and no one type of policy is appropriate in all situations.
• Employee Benefits – Life insurance is commonly included as an employee benefit.  Because of the tax deferred growth of cash value and self completing aspect of the contract at death, many large companies use life insurance as a vehicle for deferred compensation contracts.

If I die or become disabled, my family and my business partners are friends and they’ll just work it out.

Most small businesses do not survive the death or disability of a principal member. Most children do not follow parents into the family business. Most businesses do not have the cash flow necessary to pay the estate of a deceased member for its interest in the business and the business may be dissolved. Finally, in my experience, remaining family members and business partners rarely work things out after the death or disability of a member.

Employers often purchase life insurance policies on key employees to insure against the loss of services or income that might result after an employee’s death. Here, the proceeds from the policy are paid to the company. Life insurance works for business partners too, where one business partner purchases a policy to insure against the financial loss that might result from the other partner’s death or to buy out the partner’s heirs.

The Sole Proprietorship Life Insurance

The owner of a Sole Proprietorship is not a separate entity from the business. The Sole Proprietorship and the business owner are one in the same. Whatever liabilities the business incurs so does the owner. When the owner dies so does the business! Although the assets of the business can legally be transferred to a beneficiary upon the death of the owner the business has to be dissolved. The new owner has to start a new business in his or her name. The transition period can be costly. With careful planning and adequate life insurance, however, the business can continue without many problems.

You may want to transfer your business to a successor, in which case life insurance purchased by your heirs can provide funds to pay estate taxes and help sustain the business during the initial period of new management. Or, if your employees are interested in carrying on your business, a buy-sell agreement can be funded with life insurance to assure that your family will receive the optimum value for the business.

The Partnership Life Insurance

Two or more people get together to form a Partnership. Unlike the Sole Proprietorship the Partnership is a separate entity. In the event of the death of one of the partners the share of the deceased partner is of immediate concern. In order to avoid a problem in this type of situation the partners have a Buy-Sell agreement drawn up. This agreement…

• Creates a guaranteed and binding market for the deceased partners share.
• Allows the surviving partners to continue the business without interference.
• Provide immediate cash for the survivors of the deceased partner thereby eliminating possible financial problems.

Partnership Life Insurance is designed to help your business survive the loss of a partner. To preserve the business, many partnerships have a buy-sell agreement, which fixes both the price and terms of the sale in the event a surviving partner buys out a deceased partner’s interest. Life insurance can provide the necessary funds no matter when the partner’s death occurs.

Life Insurance For S corporation

An S Corporation continues on after the death of a stockholder. It does not cease to exist. The corporation should have a buy-sell agreement which states that upon the death of a stockholder the corporation will buy the deceased stockholders shares from the heirs at a predetermined price. For obvious reasons the amount should be updated on a regular basis. This agreement is binding.

The S Corporation would own a life insurance policy on the lives of it’s stockholders in amount of the stock owned. It is the owner, premium payer and beneficiary of the policy. Upon the death of a stockholder the proceeds of the life insurance policy is used to purchase the deceased stockholders shares from his or her heirs. The remaining stockholders own all the shares, the heirs are fairly compensated and everyone is happy.

We recommend that you use life insurance to create a pre-death buy-sell agreement certifying that if a stockholder should die, the remaining stockholders can purchase his/her shares at a fixed price. This will guarantee that heirs will receive cash for their inherited business interest and that surviving stockholders will maintain control of the business.

Executive Benefits
Many employers provide selective benefits to key employees to enhance the benefits normally available to employees. Life insurance can be valuable in providing theses selective benefits.

Some examples are:

• Bonus Plan
  Many employers offer benefits that they feel meet the needs of and help retain highly valued employees. A bonus plan that incorporates employee-owned life insurance is one way an employer can tailor a death benefit to meet the needs of specific individuals.
• Split Dollar Arrangement
  A benefit that has historically served key executives is the split-dollar arrangement. Split-dollar is not a type of policy but, rather, a way to share the costs and benefits of a single life insurance policy.
• Executive Compensation
  When an Employer decides to provide additional retirement or certain types of deferred compensation to key employees, life insurance is often used to informally fund the promised benefits.

Whole life insurance has traditionally been used to fund these buy-sell agreements but term life can be used on a temporary basis. The 20 year level term or the 30 year level term policies can be used.