So you have started a new business and it is successful. What happens to your business and more importantly your family in the event of your passing. What can be done to protect them?
Entrepreneurs are often too busy developing an idea and building a successful company to consider what would happen to their business if they, a partner or a key employee were to die suddenly.
If they’ve guaranteed a business loan, it’s likely that the lender will call the loan upon the death, leaving the successors without critical working capital.
“A business owner has the obligation to protect the ongoing viability of the business,” according to George Black, SCORE counselor and a former insurance industry advisor.
The best way to reduce this uncertainty is to have life insurance for your business.“Life insurance can soften the economic blow and provide the necessary cash to stay in business during the transition,” says Black.
It may not be optional. Before making a business loan, many banks will require the business owner to have a life insurance policy. Life insurance can provide for the successful liquidation of a financial interest in the business, thereby protecting heirs. If employees are scheduled to assume ownership following the death of the owner, the insurance policy can be designed to provide funds for the purchase of the business.
In addition, the life insurance policy can be used to pay federal estate taxes. It also can fund a buy-sell agreement between partners.
If the business is to be sold outright after a death, the policy will provide working capital for the transition. The availability of a ready source of cash will make the business much easier to sell.
Assets are usually discounted during such a sale and the availability of insurance funds will help your heirs.
A related type of insurance is “key person” insurance, which compensates a company for the loss of any other employee who is vital to the business operation. The business has funds to tide it over while the business slows down, and there are funds to search for and compensate the key person’s successor.
To clarify, there are three types of life insurance that would be the most useful to a business owner. These are individual life insurance, buy sell agreements, and, as mentioned above, key person insurance.
Individual Life Insurance
Technically, individual life insurance is coverage for a business owner’s family. What makes an individual life insurance policy important for a business is defense against a distressed sale. Many small business owners take loans out using their personal assets as collateral. When the business owner dies, the surviving family members sell the business to cover the loan obligations. This creates a distressed sale situation where the business might be sold for significantly less than actual value. An individual life insurance policy on the business owner for an amount equal to obligations defends against this type of situation.
Buy Sell Agreements
In the simplest terms, a buy-sell agreement is a contract created so a deceased business owner’s share of the business is bought at a predetermined price through life insurance. This is a protection against the deceased business owner’s family members taking ownership of a business they may not have the desire or skills to operate.
Key Person Insurance
Key person insurance provides the business with cash if a critical leader or revenue-producing employee were to die. There are many unacknowledged costs that come with losing a crucial member of a business. The business may lose clients, contacts or connections that drive revenue. Additionally there is cost to search, hire, and train a replacement. All of these costs add up very quickly, and without the proper life insurance to provide needed cash, the gap between employee loss and replacement can critically injure a small business
For businesses with multiple owners, each partner should have a life insurance policy to facilitate an automatic buyout of the dead partner’s interests.
For more information give us a call at 800-301-8113 or visit goldcoastlifeinsurance.com for a quote.
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