Imagine a situation where you have worked with a partner (or group of partners) to build a business. You have built things from the ground up. Sweat equity has built an idea into a successful business. How do you use life insurance to protect what you have built?
In the early stages of a business you may see that the owners of the business get involved in owing insurance as a way to guarantee creditors that they will be paid back in the event that something happens to the owner of the company. The key consideration here is that the business owner is protecting whoever would inherit their business by having insurance proceeds available in the event of their death to clear up money owing to creditors.
Another situation where you see businesses owning life insurance is to fund a buy-sell agreement that is triggered when a partner dies. This is an agreement that requires the deceased partner’s heirs to sell the shares of the business that they inherited to the surviving partners. Often the purchase price is determined in the agreement and the funding for the purchase comes from life insurance. The reasoning behind these agreements is that it isn’t always desirable to have the beneficiaries of someone’s estate take over ownership of a business. Having a legally binding contract to eliminate this situation is a solution that helps both parties. Funding it with life insurance allows the business to pay the premium on the policy rather than keeping cash on hand to pay the deceased partners share out. In most cases this is a far more desirable situation.
Another time that you may see business owners getting involved in owning life insurance is on a key employee that the business has. If there is a situation where an employee becomes vital to the operation of your business you need to plan what happens to the business if they aren’t there any longer. A key person is someone has a unique skill set, talent or experience related to our business. If this person were lost there would be financial repercussions that need to be addressed. By owning a life insurance policy on a key employee your business will be provided an injection of capital in the event of the employees death. This allows you to fund the search for a replacement, the training of the replacement and other costs to the business associated with the loss of the key employee.
Using life insurance can help you protect both the business that you have built as well as the heirs to your ownership.