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#1. Protect the Business at Death of Owner or Key Person

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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
  • Retire debts
  • 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. 

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