Don't Let Your Business Die With You

The timing of life's uncertainties is unpredictable, yet for business proprietors, securing life insurance is essential. Life insurance for business owners serves to safeguard not only your loved ones but also your company's financial stability.

Here are some ways you can use life insurance as a business owner.

Ensuring Continuity for Your Business

Life insurance tailored for business owners serves as a vital tool in sustaining your company through various circumstances. It can be used to pay off business debts, save money, and fund the search for a successor if you die. Moreover, if your business owner life insurance policy includes a cash value feature, you can leverage these funds to foster tax-free business expansion, even during your lifetime.

Facilitating Partnerships Agreements

For businesses with multiple partners, a partnership agreement is often established to outline procedures in case of a partner's death or incapacity. Typically, this agreement grants surviving partners the option to purchase the deceased or incapacitated partner's share. Life insurance can play a crucial role in funding this buyout.

To Equalize an Estate

For a family business, life insurance can be used to make sure everyone gets a fair share of inheritance. Let's consider a scenario where a parent is the owner of a business and has two children. One of the children is employed in the business, while the other is not.

Insurance assists with estate planning by allowing one child to inherit company shares. Additionally, it enables the other child to receive funds from the insurance policy. This approach ensures fairness in the final estate distribution.

Safeguarding your Families Future

Consider the repercussions on your family's financial stability in the event of your unforeseen passing. Without your income, they may struggle with mounting debts and a diminished standard of living.

Life insurance is important. It provides financial support for your family. It helps maintain their current lifestyle. This is especially crucial if something happens to you.

How Does Life Insurance Work for Business Owners?

Life insurance for business owners provides financial security for the company if the owner dies. The recipient of the death benefit can use the money for various purposes. These include paying off debts, supporting their family, or keeping their business running. The usage of the money should align with the policyholder's wishes.

In business partnerships, life insurance can help buy out a partner's share if they die or vice versa. This makes sure that the business can keep running smoothly, easing any worries the family may have about managing it.

3 Types of Insurance for Business Owners

Individual Life Insurance

Individual life insurance is designed to protect your family and cover any personal liabilities you may have. It serves multiple purposes, including income replacement, debt settlement, providing an inheritance for your children, and ensuring your family's financial stability.

A commonly recommended guideline suggests obtaining a personal life insurance policy with a death benefit approximately ten times your annual income. For a precise evaluation tailored to your circumstances, utilize our life insurance calculator. 

Key-Man Life Insurance

Key-Man life insurance protects your business if an important owner or employee dies.

Individuals in ownership or key positions fulfill critical functions vital to the business's operations—from asset management to debt obligations and operational duties. The sudden absence of such individuals can significantly disrupt business operations.

Key-Man life insurance is tailored to address the immediate needs of the business, covering expenses such as outstanding debts, share buybacks, recruitment and training costs for a replacement, and even meeting severance obligations in the event of business closure or workforce reduction.

Buy-Sell Agreement

A key part of business owner insurance is the buy-sell agreement, especially if you have partners. A buy-sell agreement is a contract between business owners. It explains what happens in certain situations. These situations include if a partner dies, becomes disabled, or wants to sell their share of the business.

There are two primary types of buy-sell agreements:

• Cross-Purchase Buy-Sell Agreement:

In this arrangement, each business owner purchases a life insurance policy on the other owners. When an owner dies, the other owners receive the death benefit. They then use this money to purchase the share of the deceased owner.

• Entity Purchase Buy-Sell Agreement:

Alternatively, in an entity purchase buy-sell agreement, the business itself procures life insurance policies on each owner. If a partner dies, the business gets money from their life insurance to buy out their share of the company.

Term vs. Permanent: Which Should You Choose? 

Term life insurance and permanent life insurance stand as the primary categories within life insurance. Within permanent life insurance, there are various products such as whole life insurance and universal life insurance. Below, we explore the key distinctions between term life and permanent life insurance.

• Term Life Insurance

  • Provides level premiums for a set period of time, typically 10 to 30 years with the option to renew, but at a higher price

  • Does not build cash value

  • Acts as a liability on your balance sheet

  • Less expensive than permanent life insurance

• Permanent Life Insurance

  • Can provide coverage for your entire life, so long as you pay your premiums.

  • Can build cash value that you can access through a policy loan or withdrawal for business needs.

  • Acts as an asset on your balance sheet because it builds cash value

  • More expensive than term life insurance

Whether you should choose term or permanent life insurance depends on our saturation.

Bottom Line

Getting the right life insurance is important for business owners. It helps protect your loved ones and ensures the financial stability of your enterprise.

You can protect your family's future and your business by learning about different types of life insurance. These types include individual policies and buy-sell agreements. 

Making smart choices is important in this process. With the guidance of a financial advisor, you can navigate the complexities of life insurance, ensuring that you have the coverage necessary to mitigate risks and seize opportunities for growth.

Sources:

https://www.forbes.com/advisor/life-insurance/life-insurance-for-business-owners/

https://www.forbes.com/advisor/life-insurance/term-vs-permanent-life-insurance/

Disclosures:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

This site may contain links to articles or other information that may be on a third-party website. Advisory Services Network, LLC is not responsible for and does not control, adopt, or endorse any content contained on any third-party website.

This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.