Insurance Every Business Owner Needs
Nobody likes to talk about life insurance. Between the high costs, having to think about death and the sleazy salespeople that are all too common, it’s easy to see why.
Small business owners seem to be even less apt to have a discussion about life insurance. They often focus all their time and money back into their business and don’t stop to consider their business’ financial needs.
But there are three common situations in which life insurance can provide the needed protection to solve big problems that many of these business owners face:
Equalizing Your Estate – A common occurrence is a business owner with two or more children where some but not all of their kids are involved with the business. If the owner passes away and leaves the business shares equally divided between their children, those involved with the company now have to contend with a partner/sibling who may be more inclined to want to sell the business off or be paid out for their half right away. Assuming there are two children and that one is involved and the other is not, an insurance policy can be setup for the fair market value of the business and you can name the un-involved child as the beneficiary and leave 100% of the business to the other child who works in it. This provides both children with an equal inheritance and keeps everyone happy.
Death of a Key Employee – Many smaller companies rely very heavily on the contributions of one or two critical people who could be an owner or a key employee. What would happen to the business if that key person was to pass away suddenly?
Having life insurance on key people will provide cash flow to the business to make up for lost revenue and the money can be used to find or train an appropriate successor. Many business loans will require a “key person” insurance policy and if that is a condition of your loan, you can usually deduct some or all of the insurance premiums.
Funding a Buy/Sell Agreement – In the case of multiple business owners or partners, a buy/sell agreement should always be in place to clearly spell out what happens if one of those partners passes away. A life insurance policy should be setup to fund the buy/sell agreement.
In most cases, the agreement will lay out a very tax efficient plan for the company to purchase the deceased’s shares from his widow or estate and these heirs receive the money that the insurance policy provides, often largely tax-free using the Capital Dividend Account.
In many cases, these insurance policies can be purchased inside your corporation, using more tax efficient corporate money. It is critically important that you understand all the tax implications and setup these policies properly.
You’ve put thousands of hours and likely many sleepless nights into growing your business into the success that it is. Take a few minutes to ensure that you’ve got the proper protection in place to keep it that way.