The decision to use life insurance can be a crucial one for your business and your family. Here is the first blog in our series where we will highlight the Top 6 Reasons Why Smart Business Owners Use Life Insurance.
Protecting the entity and deciding when and whom to eventually transfer it to, is a critical part of retirement and succession planning for business owners. The particular tools and techniques used in a business succession plan will depend on the goals and objectives of the senior generation business owner, the junior generation family member involved in the business, key non-family employees, and family members not involved in the business.
What follows is the first of the top six reasons why smart business owners use life insurance as a key component in their strategic business succession, retirement, and estate plan.
#1. Protect the Business of Death of Owner or Key Person
With many small businesses, the owner is also the key person in the company. Key-person life insurance is purchased on the life of the business owner to protect the company if the owner unexpectedly dies. In fact, the death of an owner of a small company without key-person insurance often results in value of the company declining and the enterprise being shuttered soon after. With key-person insurance, the company purchases a life insurance policy on the key employee, pays the premiums, and is the beneficiary of the policy. If that key person unexpectedly dies, the company receives the insurance proceeds. Key-person life insurance on the business owner can provide much needed stability; if the business owner dies, the business receives the policy proceeds and can use the funds to:
Pay expenses while searching and hiring a capable replacement
Distribute money to investors
Pay severances to employees
Explore options other than immediately going out of business
Buy time until the business can be closed, and the assets liquidated
In addition, many privately-held and family-owned businesses depend on non-family employees for the company’s continued success. Key employees typically posses unique skills and abilities, have critical industry relationships and licenses, and, as a result, are expensive to replace. To guard against financial loss due to the death of a key person, and to ensure that the business stays in the family, many privately-held and family-owned companies acquire key-person life insurance on their key employees.
Our second blog in this series addresses how life insurance protects a business owner's family and ensures the survival of the company.