You may think life insurance is only intended to provide protection for your loved ones in the event something happens to you. Personal life insurance protects your spouse and children who depend upon your income. But there is more to life insurance than the personal protection it affords.
In working with small businesses throughout our ten-year history, we have found that many business owners either overlook or do not think about how to protect their business in the event of an unforeseen life-threatening illness or death.
Life insurance is a critical element to the sustainability of your business. What steps can you take to perpetuate your business in the event you as the business owner or a key member of the business dies unexpectedly? Below are types of business life insurance to incorporate into your business strategy.
Key Man Insurance
This insurance is intended to cover the people who are critical to the operation of a business. The “keys” to your business. There are numerous costs that occur when a critical member of the business dies, including costs required to replace that key person. A key man insurance policy provides the money required to fill the gap that occurs. Without these funds, a small business may not survive.
Here’s how the policy works. Essentially, the business purchases a life insurance policy on the key person. If that individual dies unexpectedly, the company is the recipient of the benefits under that policy. Typically, when a small company experiences the death of a key individual, the business dies with them; hence, the need to carry a life insurance policy on that individual. The payout from the policy serves as a buffer to cover expenses until a replacement can be found. Alternatively, those funds can be used to payout employees and investors, pay off debts or close the business. At the end of the day, key man insurance provides a company with options beyond having to file bankruptcy.
The amount of insurance you need depends on your business. Think of it in terms of the amount of money your business would need to survive until the key person is replaced and what would be required to sustain the business until it is back up and running. Work with a broker to structure your premium payment within your budget tolerance.
In instances where you have a partner or partners who are financially dependent on you, a buy-sell agreement is important. It protects a business owner if a co-owner wants to leave the company or in the event of their death. Also known as a buyout agreement, buy-sell arrangements protect all parties’ interests by establishing a predetermined price and terms if a buyout situation occurs. Should a partner die, you want to avoid having the deceased business owner’s family members take control of a business that they may not want or have the skills to run. A buy-sell agreement preserves the value of your business.
• Funding Your Buy-Sell Agreement. The partners or co-owners of a business each purchase a life insurance policy on the lives of each other. When one dies, the policy owners (either the company or co-owners) receive the death benefits from the policies and that money is paid to surviving family members as payment for the deceased owner’s interest in the business. This serves as a safety net for the surviving spouse and protects the company’s sustainability.
• Periodically Review Your Insurance Coverage. As the value of your business increases, your insurance coverage should reflect that change to ensure you have adequate coverage.
When all is said and done, having a life insurance policy can make or break the business you worked hard to build and can change the lives of those close to you. Work with a reputable insurance broker to ensure you structure the most appropriate coverage.
Watch these videos for more information on how insurance plays an integral role in your overall growth strategy for your business:
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