What would happen to your business if you or a business partner were to pass away unexpectedly? What if a key employee were to die, leaving your business with a loss of income? Many questions would linger, and without preparation, you, your family or your business could also face disputes or insolvency. Continue reading to learn more about how you can use life insurance to protect your business from the unexpected.
How Life Insurance Can Fund a Buy-Sell Agreement
All businesses with more than one owner, regardless of how big or small, can benefit from a buy-sell agreement – and life insurance is one of the most efficient ways of funding it. A buy-sell agreement is a contract between business partners that ensures buyout of a person’s financial interest under certain circumstances, such as death or retirement. However, many companies require ongoing use of capital for continuity, which often results in high debts and a slow rate of return during the start-up phase or during times of growth. If a business partner passes away during a financially challenging period, life insurance helps ensure the surviving partners have the funds to settle the agreement without struggling to procure additional capital.
According to the American Institute of CPAs, there are many financial and tax benefits to using life insurance as a means of funding a buy-sale agreement:
- Cash when you need it – Life insurance usually provides a timely payment in the form of a lump-sum of cash to fund and settle the buy-sell agreement
- Tax Exempt – Benefits from a buy-sell policy are usually exempt from tax.
- Accumulated Interest – Any accumulated value within the policy could be cashed out at retirement or in the case of a sudden disability, allowing a person to retain interest in the business rather than sell it.
Keep in mind that needs change over time as the value of your business changes. For example, if your business purchases life insurance to fund a buy-sell agreement at the start of the business, the valuation of each partner’s shares may have changed significantly since that time. It is important to regularly evaluate and review the value of the business and determine whether additional insurance coverage may be necessary. Otherwise, business partners will be left to address insufficient funding issues, which could lead to a long and complex legal process.
Insuring Key Employees
In some businesses, certain employees are critical to the continuation of a business. This is especially true of businesses with hired professionals who are responsible for producing a steady stream of income for the company. Entrepreneur.com gives the example of a business owner in Florida purchasing a policy worth three times the value of an outstanding employee’s salary. In the event of the employee’s unexpected death, the policy would provide the business owner with enough benefits to temporarily replace a percentage of the money that employee generated on an annual basis.
How Much Life Insurance Does Your Business Need?
Though life insurance may seem like a personal financial product, it can also serve significant commercial benefits. If you are the owner or co-owner of a business, chances are you can benefit from life insurance. We invite you to contact Philleo Agency Insurance and speak with one of our helpful agents about how life insurance could better protect your family and business in the future. Call us today. We look forward to serving you soon.