Life Insurance for Business Owners
Taking Care of your Business
As a business owner one of the first things you should consider is how to protect against an event that may threaten the future of the business, such as a death or disability of a proprietor, partner or key employee. Having a well thought out business continuation plan can not only help protect the business partners, but your family members as well.
The need for life insurance for a business is usually discussed in two important aspects, Key Man Insurance and Buy-Sell Agreements.
Key Man Insurance
A business may have five or five hundred employees, but in most cases there are only a few key individuals that the business depends on to exist. The most cost effective way to protect a business after the loss of a key employee is by utilizing life insurance. It can help make up for lost sales or earnings, or cover the costs of finding and training a replacement.
How It Works:
An insurance policy is purchased by the business with the key person being the insured and the business would be the beneficiary. Upon death of the key person, the business receives the death benefit that can be used for, but is not limited to:
1. To help pay expenses while the business stabilizes
2. Continuing salary for the surviving spouse
3. Secure loans for business growth
4. Strengthen the business's credit position
Buy-Sell Agreement
A buy-sell agreement is a legal agreement between owners to buy-out a co-owner’s share of the business in the event of that co-owner’s retirement, disability or death. They are typically funded with life insurance policies, allowing the remaining business owners to buy out their share at a previously agreed upon price. It can be one of the most powerful tools for managing the transition of a company’s ownership.
Buy-sell agreements can be can be customized based on the structure of the business.
Most Common Buy-Sell Agreements
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Entity Purchase:
This agreement is between the business and the owners. The business promises to buy back ownership interest from the departing, deceased or disabled owner. The business purchases a life insurance policy on the lives of its owners in the amount equal to each owner’s interest. The business pays the premiums and is the beneficiary of the policy. In the event of death, the amount collected by the company is used to pay the decendent’s estate for its shares of the business.
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Cross Purchase:
The business owners agree to collectively buy the interest of an owner who dies. Each business owner buys a life insurance policy on each of the other owners and is the owner, premium payer and beneficiary of the policy. At the death of an owner the surviving owners receive the life insurance proceeds and then purchase the share of the deceased owner’s business interest from their estate. The surviving owners will own 100 percent of the business.
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Unilateral:
If you are the sole owner of your business you can prepare your business to continue when you are no longer part of it through a unilateral buy-sell agreement funded with life insurance. If you have a family member or key employee you would like to take over the business you can create a binding contract between you and the willing purchaser. Life insurance is then purchased by the buyer on the life of the business owner, and they pay the premiums and are named as beneficiary. At the death of the selling owner the proceeds are paid to the purchasing party to help meet their purchase obligation.
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Hybrid:
Also known as a wait-and-see buy-sell agreement, this arrangement ensures that the cash will be available for an eventual buyout funded with life insurance, but offers more flexibility as to how the actual buyout will be accomplished and who will buy out the business interest of the deceased. This solution gives you the ability to delay making decisions of who will buy out your business interest.
A funded buy-sell arrangement, not matter how it is structured, minimizes the risk of the business being sold to outsiders and allows surviving owners and/or family members to retain control.
Keep your Plans Updated
Remember that as your business grows your needs will change. Your buy-sell agreement and any insurance policies may need to be updated to reflect new circumstances.
Keeping your business safe and competitive is important. If your goal is to protect your financial security and transfer your business efficiently, your Oppenheimer Financial Professional would be more than happy to assist you with developing a plan to achieve your objectives.
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