Life Insurance as a Tool for Business Owners

By on May 1, 2017

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In recognition of Life Insurance Awareness Month, we are reminded to review our personal life insurance holdings, but let us not forget about protecting our business too. Review how life insurance can help in the mundane, but essential process of keeping a business alive, managing company cash or selling for a reasonable value upon the death of an owner

Life insurance can be an extremely powerful tool that businesses can use to protect against the loss of a valuable employee or executive or manage the flow of cash. In many companies, especially small businesses, the death of one of the top producers or salesmen could result in detrimental financial loss or business profit decrease that may threaten that company’s ability to continue operations. When used properly, life insurance can help ensure the business stays afloat while searching for, and training, someone to replace the key executive, because the policy’s death benefit is made payable to the company.

3 Types of Business Life Insurance

Individual Life Insurance

This is coverage for a business owner and their family for protection against a distressed sale. Many business owners take out use their personal assets as collateral to secure business loans. When the business owner dies, the surviving family members sell the business to cover any business debt obligations. An individual life insurance policy on the business owner for an amount equal to obligations protects against the need to sell the business for less than its actual value out of desperation for cash.

Buy-Sell Agreements

In the simplest terms, a buy-sell agreement is a contract which ensures the life of your business. The deceased business owner’s interest is transferred at a predetermined price through the contract. The other owner(s) are obligated to purchase the deceased’s business interest and the deceased’s heirs are obligated to sell to prevent he 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 a business with cash if a critical owners, special skilled workers or revenue-producing employees were to die or become disabled unexpectedly. When a key employee dies, the business needs cash: to cover the expense of finding, attracting, and training a new employee; to continue the long-range development programs jeopardized by the death of the key employee; to assure creditors and customers the business will continue. All of these expenses 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.

Purchasing Life Insurance for a Business Owner or Key Employee

Determine which owners or employee(s) are essential to successful operation of the business. Consider the revenues generated by that employee and whether or not the loss of that key person would threaten the financial integrity of the company (in the short-term).

To estimate the amount of life insurance you will need on that employee, account for any company profits which would significantly decrease after the death of that person, and how much money it would take to replace those earnings during the hiring and training process that would be necessary for a new worker.

Obtain several life insurance quotes from different carriers. Consider the price of the policy as well as the features and specifications of the actual product. Decide which company you feel offers the best life insurance policy at a reasonable rate that fits within the confines of your available budget. And determine if you are eligible for any tax deductions on premium payments for s Key Person Life Insurance policy.

Discuss your situation with a qualified tax professional to determine if you meet the criteria. And understand the full financial consequences of insuring one of your employees.

Life Insurance as a Company Cash Management Tool

Aside from indemnifying the business for the loss of a key employee or helping to fund buy-sell agreements, life insurance can be an integral part of a business’ cash management strategy. Businesses want to cover the cost of their benefit programs, and reserving cash is one strategy — investing in life insurance is another.

By making ongoing premium payments into life insurance policies on a group of key employees, the company is essentially hedging its cash flows against benefit liabilities. The company can withdraw or borrow insurance cash values as needed, and it will receive a tax-free death benefit upon the employee’s death.

Calls on cash payments can be difficult to predict and potentially expensive. It may happen when a company is least able to afford both losing key employees and paying out benefits. If a business purchases permanent (cash-value) life insurance on a group of key employees, they can begin to fund these future obligations, tax-deferred.

Get professional advice before buying. An experienced insurance agent or business consultant can help you assess your business’ needs and give you the pros and cons of various policies as they relate to your particular situation. And work with a trusted financial advisor who can look at your insurance needs in relation to your complete financial plan and the needs of your business.

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About Harold Goldman

I am the founder of FinancialSafetyNet.org, and a Retirement Planning and Long-Term Care specialist. I am also the President of Emes Insurance Services, Inc., a Murrieta based insurance agency designed to help people with Retirement Planning and funding for College. I believe in educating my clients to become financially competent in an effort to develop plans for guaranteed income, protection against loss and tax-advantaged growth. To contact me Call (844)-376-2265

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