Business Uses for Life Insurance
Our most recent posting compared individual insurance policies with group Insurance policies. Businesses often purchase group policies as an employee benefit for their workers, but a business can also utilize life insurance to accomplish succession goals.
Some small businesses are organized as partnerships between two or more individuals. In order to prevent an unwanted or unqualified person from inheriting ownership in the event of an unexpected death of a partner, many small businesses will execute a “buy-sell” agreement. This legally binding contract stipulates how a partner’s portion of the business may be reassigned if that partner dies. In a cross-purchase buy-sell agreement, the remaining owners will be buying the interest of the deceased. In a redemption agreement, the business entity will be purchasing the deceased ownership stake. In this way, the original partner(s) can avoid having to share ownership with an heir who might be unqualified, disinterested or problematic in any of a myriad of other possible ways.
The obvious next question is, “Where will the money be found to execute the purchase?” This is where a life insurance policy becomes very beneficial. The buy-sell agreement can be funded by the death benefit associated with a policy purchased on the life of a partner. In its simplest form, two business partners can each own a life insurance policy covering the life of the other partner. It can easily get more complicated for a business with several partners as the cross-ownership costs and number of required policies grows. Utilizing a redemption agreement can possibly address this complexity as the entire business is required to execute the purchase, rather than any individual. Needless to say, an effective buy-sell agreement is not something that should be drafted without professional legal, insurance and accounting assistance.
Still another business use of life insurance is key person insurance. Many small businesses rely heavily on the expertise of one or two individuals. Insuring their lives can provide a death benefit that can be used to hire or train a replacement, or might even be used to improve cash flow until a successor can be located and put in place. Many small businesses have failed due to an untimely death when no plans were in place to address the lost skill set.
If you would like to learn more about these and other wise financial planning moves, please contact us through our Level 5 Financial LLC website or via phone at 719-323-1240. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.