There really isn’t any magic to business life insurance. Just like personal life insurance you pay a premium (payment) to an insurance company so that if or when you pass away your beneficiary won’t be stuck in a financial bind. The difference is subtle. One is all about making sure your family doesn’t have to liquidate everything they have just to move on with life. Business life insurance is all about making sure a company doesn’t have to close it doors and can overcome the downsides of losing a partner or a key person like the CEO.
One downside of a death of someone in a business situation is that the company, in the absence of life insurance, usually doesn’t have huge pools of cash laying around to just pay the problem away. Combined with that problem is the fact that if a business has just suffered the loss of, say, their CEO or President, banks are generally a little reluctant to lend large amounts of money until they know that the business will survive and regain stability. Conversely, without the necessary money the business may not survive or regain stability. So let’s talk about 5 ways that life insurance can keep the business wheels greased and why using the right agent and company can hold the bottom of the bottom line intact.
1. Probably the most frequently used type of business life insurance is for loan collateral. Lending institutions are real keen on having life insurance on the person that is most likely to make the company successful in paying back a large loan. The SBA, Small Business Association, requires life insurance for every start up business loan and most banks will require life insurance on expansion and building loans. For SBA they want the primary owner, or if it’s going to be a partnership, the partners insured. In an established business it usually the CEO or President whose life is insured.
2. Stock buy out or stock redemption life insurance is often required by a board of directors when a person owns more than just a casual amount of stock. It’s often in the companies best interest to pull back a large shareholder’s stock rather than let it go to sale on the open market. Large percentages of a company’s stock hitting the market suddenly can have an adverse effect, often driving the value down, so if the company can have an agreement in place with the shareholder that they will buy the stock back at a fair market value, it can benefit both the shareholder’s family and the company.
3. Key person life insurance is becoming more and more popular, again as a tool of stability in the event that a key person, whether the CEO or the company’s best salesperson should died unexpectedly. Insuring the life of a CEO is something of a no brainer, but suppose your company’s success was really due to the efforts of the head of the sales department or possibly the head of manufacturing because respectively they bring in the continued growth and ensure great products delivered in a timely fashion. Whoever it is, what’s being insured is the reputation of the company and with the insurance their commitment to make sure the key person is replaced with someone of the same caliber.
4. Key person insurance can sometimes be combined with a cash value life insurance policy as a retirement bonus or incentive program. During that person’s working years the insurance protects the company, but upon retirement the ownership of the policy goes to the insured and they can keep it in force or cash it out.
5. Buy/Sell arrangements in partnerships are a business saving tool. By law if a partner in a legal partnership dies, their family becomes the owner of their share of the business. The surviving partner has a choice to make. He can buy the family out or, if as explained in #1, the cash isn’t available, the deceased partner’s family can either fill his position in the business or force the liquidation of the business. By funding a buy/sell agreement with life insurance both partners agree ahead of time to a buy out value (updating with growth is obviously necessary). Each carries life insurance on the other and is the beneficiary of the policy on the other partner’s life. With the buy/sell agreement in place they then purchase the deceased partner’s share of the company from his family, maintaining the integrity of the business and giving the family what they should receive for the years of hard work.
Something that is not as necessary with personal insurance that is crucial with business insurance is the involvement of attorneys and accountants. Business life insurance properly structured can save a business. If not done correctly it can create a taxable event that could have been avoided. As business owners we are famous for looking at expense from a tax deductible standpoint, but with life insurance deducting premiums as an expense can ruin the tax free status of the death benefit. The relatively small write off isn’t worth losing a large chunk of the money that was meant to keep the company on all four wheels.
And last, because business people are just like the rest of us and have issues that can affect our insurance rate, using an agent experienced in business life insurance and also experienced in impaired risk, finding the best possible rates in challenging circumstances is critical. If you have questions, don’t have business life insurance or feel like you’re paying too much for your business life insurance, call or email. We can help. For those in a life insurance bind or time crunch we have products that can be in force for business purposes within just a few days.
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