Do You Need Business Life Insurance?
Business life insurance is an important planning tool for any business. The death of a sole proprietor, partner or key employee can have serious consequences for the continuation of the business. A forward-looking business owner will try to anticipate such circumstances and prepare for minimal disruption to the business in the event of such a tragedy.
Essentially business life insurance is just a form of life insurance where the proceeds are intended to be used in relation to the business.
The funds could be used to repay loans or lines of credit or they may finance succession or estate planning.
A business could take out a life insurance policy specifically for the purpose of allowing the survivors to buy out the business from the estate of the deceased sole proprietor or partner. In this scenario, the beneficiaries of the estate would receive payment for the value of the business and the surviving partner or employee would have funds available through the insurance policy to buy the business. A buy sell agreement would need to be set up in advance with an agreed upon purchase price. The value of the life insurance would then be set to match that purchase price. To protect the interests in a partnership, a business life insurance policy would be taken out on the lives of each of the partners. This would allow the survivors to purchase the business from the estate of the deceased partner. If the business life insurance policy is one of the permanent types of life insurance it would have cash value. This type of policy creates the option to take out a policy loan which could be used for emergency needs, expansion or any other business needs. Another way the proceeds of the business life insurance policy can be used is to hire a manager to keep the business going during the time when the business is for sale. A successfully functioning business will attract a much better price. The funds also could be used as a source of working capital if the death of a key person makes it difficult to access funds from other sources. This funding may allow the estate to more readily carry on business until it receives a satisfactory offer. If the life insurance was for a key employee, it could provide the necessary funds to hire a temporary replacement while arranging to recruit and train a suitable replacement. Well, as you can see, there are numerous reasons why it is practical for a business to set up business life insurance. The whole purpose is to provide protection during the transition to new ownership or closing of the business while protecting the interests of the estate of the deceased. This article has covered just a few of the relevant issues and considerations. It is recommended that you work with a business life insurance expert to decide on the most advantageous way to set up business life insurance that fits your exact circumstances.
| 