Many small business owners invest considerable time in developing a comprehensive business
plan. They assess the market for their products or services. They set revenue goals and
project expenses. They map out a marketing plan, an organizational structure, and more. But
many entrepreneurs overlook one critical aspect of business planning. They fail to take into
account what will happen to their businesses at the time of their death or the death of a key
employee. While most of us think of life insurance as a tool for protecting our families from
financial troubles after we pass away, a business, if it’s to survive and thrive, needs similar
protection.
On the surface, business and personal life insurance policies work the same way. You pay
premiums. When you die, your policy pays a death benefit. The larger the death benefit, the
more you will play in premiums. But business life insurance can serve a variety of strategic
purposes. Depending on who owns the policy and who you name as a beneficiary, the best
business life insurance can protect your family, your business partners, your employees, and
even your vendors. Business life insurance gives the people you care about more options when
they try to figure out what should become of your business when you’re no longer around to
run it.
Most businesses elect to carry term life insurance. Whole life insurance offers benefits for the
living and is considered part of a comprehensive personal financial plan. But those benefits
are less important to a business. What matters most to businesses is the death benefit a
policy provides. Since term life insurance is the less expensive option, you can purchase more
coverage for less money than you could were you to purchase a whole life policy.
Like personal life insurance, business life insurance can put your mind at ease. The same goes
for your family and colleagues. Let’s take a look at how.
Why might you choose to make a family member your policy beneficiary? If you’re a sole
business owner, the death benefit your family receives can be used to hire someone to take
on your responsibilities and keep the business humming. If you own your business in
partnership, your family member might choose to use the policy’s death benefit to buy out a
willing partner.
The reverse is also true. Let’s say you make your partner the beneficiary of your policy. Then,
if you leave your part of your business to a family member in your will, your business partner
can use your policy’s death benefit to buy a family member’s share of the business.
In a business partnership, it often makes sense to purchase multiple policies to cover each
owner. Most business owners structure their policy purchases one of two ways. Under the first
scenario, each partner purchases a policy that covers his or her business co-owners. The
surviving co-owners are named as policy beneficiaries. That approach is known as a
cross-purchase strategy.
Alternatively, insurance policies on each co-owner can be purchased by a business itself. The
business is both the policy owner and the policy beneficiary. This is known as an entity
agreement. When one partner dies, the proceeds of his or her policy are used to purchase the
deceased’s share of the business from his or her heirs. Each surviving partner’s interest in the
business increases accordingly.
For an added measure of certainty and control, both entity and cross-purchase life insurance
agreements are usually moderated by a contract known as a buy and sell agreement. This
agreement stipulates that the death benefit paid by a policy must be used by the policy’s
beneficiary to purchase the deceased’s share of the business. A buy and sell agreement is one
way to ensure that your family members get quick, simple access to the assets you wish to
leave them and ensures a smoother transition for surviving business owners. A business law
firm like MHA Law can assist you in drafting a proper, legally binding buy and sell agreement.
You can’t establish an effective strategy without knowing your goals. Be very clear about
what you want to see happen to your business should you die. And as difficult as it is to think
about—and especially talk about—your own death, it’s critical to engage your family and your
business partners before you purchase a policy or policies. Your vision may or may not align
with theirs. It’s best to have everyone’s buy-in before implementing a life insurance strategy.
Finally, because life insurance policies are complicated, seek out expert advice before making
insurance decisions. Talk with an insurance agent who specializes in business insurance.
Consult with a tax accountant and find out whether you can purchase insurance in such a way
that it reduces your tax burden. And seek advice from an attorney experienced in estate
planning to be sure your insurance purchase supports your end-of-life wishes overall.
Author Bio:
Susan Doktor is a journalist, business strategist, and principal at Branddoktor. She writes on a
wide variety of topics, including personal, family, and business finance. Follow her on Twitter
@branddoktor.
