Having your own business creates the need for additional life insurance – over and above any policy that you have for the basic provision of your family. A business often creates obligations that are above and beyond normal living expenses, and these are the exact situations you’ll need life insurance for.
Life insurance you keep on your business partners
If you have business partners, including several stockholders in a closely held corporation, you should have life insurance on each of those partners. The need comes from the fact that the death of any one of them will either create or expose the business to obligations that the deceased partner is no longer around to help cover.
Small businesses often have buy/sell agreements that provide for the automatic transfer of business ownership from the deceased partner to the surviving partner(s). That transfer will usually require a certain amount of capital, and those funds typically come from a life insurance policy.
If the business maintains a life insurance policy on each of its partners – with the death benefit going to the partners – the surviving partners will be in a financial position to buy out the deceased partners interest in the business from his or her family. The funds can also be used to payoff any debts that may become unsustainable upon the death of one of the partners.
A life insurance policy provides the capital for the buyout and/or debt settlement, so that the other assets and financial resources of the business are not impaired as a result of the death of the partner.
Life insurance on you for your business partners – and your family
The same buy/sell agreement that will cover you and your other surviving partners in the event of the death of one of the partners, can also protect your partners and your family in the event of your death.
The buy/sell agreement should include a life insurance policy on every one of the partners, including you. In the event of your death, your partners will have the capital to buy out your equity in the business, and continue the business in your absence.
But the funds that are used to buy out your stake in the company will also be a benefit to your family. The buyout funds are paid to your family for your equity in the business – which means that your family will receive additional funds upon your death as a result of the buy/sell agreement in your business. This will be over and above any other life insurance policies you have for your family.
Life insurance for key employees
The business can also take out life insurance policies on key employees, so named key life insurance.
A key employee is an employee of the business, and not a partner or shareholder. But the employee may be so important to the business that their death could have a severe negative impact on the company, or even threaten its future survival. The key employee could be an important salesperson, the manager of a significant division, or even an important creative or administrative person. The death of the employee will impair the operations of your business.
As a business owner or shareholder in a small company, you can take out a life insurance policy on any employee deemed to be a key employee of the business. Though this will not permanently replace the key employee’s future contributions to the business, it will provide valuable time to find a new employee to fill the same role, as well as funds to cover any financial losses in the interim.
Life insurance to cover a major debt
If you have a business and you take on a major debt, you should also consider taking a life insurance policy to payoff the debt the event of your death. This will be necessary whether or not you have partners in the business with you.
The need for life insurance to payoff debt will be obvious if you have partners, since it will be necessary to eliminate the debt in order for the business to survive. But if you are a sole proprietor, the business – including the debts – will go to your family. If no one in your family is in a position to take over the business and run it in your absence, then they will either have to sell it or close it down completely.
Whether the business is sold or closed, it will be easier to accomplish the objective if any debts associated with the business have been paid for. In addition, the sale of the business will include more proceeds to your family if the business carries no debt.
If you have a business, sit down with a reliable insurance broker and consider the needs of your business and how life insurance can help cover them.
