As a business owner, you understand the hard-work, dedication, and commitment that goes in to starting, growing, and maintaining a successful business. As your business evolves, it presents different challenges to you as the business owner. Your operation may no longer be the small start-up it once was, instead, an established business with loyal customers and a growing staff. As you plan for the future of the business, you are likely considering your remaining years of active participation in the business, but also the long-term future, including succession planning.
Here are some common scenarios where life insurance can provide significant value:
Death of a key person.
As a small business owner, you, along with some of your employees may be critical to the success of your business. If a key person were to die, it could have significant short and long-term implications on the operation of the business. In order to protect your business, a key person life insurance policy will provide cash if the key person dies, to cover business expenses, debt payments, pay salaries, and allow you to find a successor to your key employee. Having a policy in place may even be a requirement if you borrow money from a lender as collateral. In most cases, key person life insurance is usually a term insurance policy, providing coverage for a set number of years.
Covering taxes on death.
One of the most common concerns of business owners, is the tax bill for their shares upon their death. When you pass away, you’ll be deemed to have sold your business shares, which will trigger capital gains and resulting taxes. The more your business has grown – and will grow in the future – the larger the tax bill at death. Including your business in your estate planning and purchasing life insurance can ensure that this financial burden isn’t passed on to your loved ones after your passing.
Equalizing an estate.
In addition to paying for the taxes incurred at death on the sale of the business shares, business owners with multiple kids might want to ensure equality in the legacy they leave for each child. If one of the children is actively involved in the business, and is expected to take over ownership of the business, it might be difficult to ensure other children are receiving their fair share of the estate value. If there are children not actively involved in the business, it usually doesn’t make sense to thrust them into the business, without adequate experience or knowledge, just to ensure equal treatment. It can result in tensions, poor business decisions, and eventually the failure of the business, not to mention the effect it can have on the personal relationship amongst the kids. An insurance plan allows the shares to be left entirely for the children involved in the business, and the cash payout from a life insurance policy can be left to the remainder of the children to provide equal value and maintain harmony in the family.
Transfer of control of the business.
Whether you are the sole owner of your business entity, or you have partners, planning for the efficient transfer of the business to another partner is an important planning consideration. In many cases, if the business has grown to a more significant value, the other partners or parties may not have quick access to cash required to purchase the business. They may also find that it is difficult for a business to obtain a loan after a key employee or an owner passes away, as it could dramatically affect the operations and lenders may not want to take that risk on. Taking the time to plan a proper buy-sell agreement or business succession plan will eliminate a lot of work in the future, making the transition much easier and more cordial. Life insurance policies play a key role in succession planning and buy-sell arrangements, as they provide the cash required for the purchasing parties to buy out the deceased owner. The business is protected, the new ownership can begin the next chapter, and the family of the former owner is also financially compensated as a result of the succession planning and life insurance protection.
