Business Life Insurance
Most people think of life insurance only as a product to replace missing income for families in the event of the death of a breadwinner. However, life insurance can also be used to make sure that a business continues to thrive after the loss of an owner or key employee, as well as help provide financial security the heirs to that owner. Needless-to-say, business life insurance is a major component to any successful business model.
Some Common Uses of Business Life Insurance Include:
Buy-Sell Agreement Funding
As you probably already read in our section about Buy-Sell Agreements, a business can utilize such an agreement to sell business ownership from one party to another. The buyer can insure the life of the seller (whether that be a surviving owner or the business itself), so that if the seller dies before the planned completion of the transaction, the sale may be completed, and the business survives.
Continuation of a Partnership
Partners may insure the lives of each other, so that the surviving partner may buy out the interest of the deceased partner. This helps both the deceased partner’s heirs and the surviving partner. It also allows the business to continue.
Key Employee Coverage
The success of many businesses is due to the talents and efforts of its owners or key executives. The death of such a key person may cause a monetary loss to the organization, or cause the business to locate, recruit and hire a replacement. Insuring the employee’s life may provide the funds needed to overcome the loss and continue the success of the business.
Collateral for a business loan
Small business owners are familiar with the term “personal guarantee.” Lenders often require the pledging of personal assets to collateralize business financing. Assigning the proceeds of a life insurance policy can fill part of this need.
Let’s say you have an employee that you don’t want to lose. You may execute a Deferred Compensation Agreement which allows the employee to collect $5,000 a month, beginning at age 65, payable for 15 years. Your company could purchase a $1 million permanent life insurance policy on the employee’s life. If she dies prior to retirement, her family receives the benefit. When she retires, the cash value that accumulated in the policy can help pay the agreed-upon deferred compensation.