Life insurance doesn’t just provide peace of mind for families, it can also provide security for businesses.
Many businesses, particularly small businesses or family-owned businesses, purchase life insurance for key employees in order to ensure that the business has the wherewithal to continue operations in the event of the untimely death of a pivotal figure in the business and the uncertainty that untimely death may cause.
When a partner in a small business dies, his or her ownership interest in the business will devolve to that partner’s estate. This estate may be subject to estate taxes and the remainder will be claimed by the partner’s heirs. These heirs may not have the ability or the desire to continue in the business, which leaves the other partners with the problem of buying up the deceased partner’s share of the business.
This can be potentially devastating to a small business, which is likely rich in assets, but short on the necessary cash to buy up a partner’s stake in the business. In the case of small businesses, with just two or three partners, the death of a partner can be the death of the business if the other partners have to liquidate its assets to purchase the deceased partner’s stake. Even if the other partners can come up with the cash to purchase the deceased partner’s share of the business, it can be extremely stressful to their finances.
This is where a business life insurance policy can help protect your business. If all the partners in a business agree to purchase a business life insurance policy that pays out to the other partners so they can purchase the deceased partner’s stake, it can prevent the uncertainty and chaos that the untimely death of a business partner can wreak upon a business.
Business life insurance policies are typically taken out on the key figures of a business. Typically these policies are term life policies.
Here’s a typical scenario illustrating how a business life policy can provide protection for partners in a business:
Let’s say John Roberts and Barry Farmer are partners in a construction business worth $400,000. Roberts and Farmer have both agreed to sell the other partner their stake in the business in the event of death for $200,000. Both purchase term life policies for $200,000 and name the business as the beneficiary. Roberts dies unexpectedly. The business then collects the proceeds of the life insurance policy. Farmer than uses this money to purchase Roberts’ stake in their business.
Life insurance policies don’t just offer protection for partnership businesses, however. A life insurance policy can also be helpful to a sole proprietorship business as well.
A sole proprietorship business relies upon the singular talents of one individual to foster its success. The business may have multiple employees, but without the proprietor, it’s very likely that the business will be unable to continue. These businesses are often the sole stream of income for the proprietor’s family, so the death of the proprietor can leave that family in dire financial straits. And if the family is forced to immediately liquidate the assets of that business, they could end up not getting anywhere near the full value of the assets of the business.
A good life insurance policy can help sole proprietorship businesses and the families they support weather a crisis created by the death of the policy. A life insurance policy with the business named as the beneficiary can provide the business with the money it needs to continue until it can be sold to a third party or an employee capable of stepping up and continuing the business. It can also provide the family of the proprietor with enough cash to keep them afloat until they can arrange a sale of the business’ assets under favorable terms.
Business life insurance is commonly obtainable at rates that are lower than or competitive with term life insurance. The cost of insurance is usually much lower than the amount of benefits paid out, and the benefits are usually exempt from federal income taxes.
Creating a legacy takes a lifetime, undoing it only takes a minute. The death of a key person can be a devastating blow to a business, but a life insurance policy can help mitigate the damage. With a life insurance policy and a buy/sell agreement or business continuation plan, a business owner can ensure that his or her life’s work will continue after he or she is gone, providing the business owner’s family, and his or her employees with the income and security that they are accustomed to.