Life Insurance for Business Owners
It’s certainly important for small business owners to budget carefully and handle their company’s funds in a responsible manner. While it’s important to watch spending, it’s also important to make sure that the business owners are covered with a sufficient amount of life insurance for business owners. Without proper insurance coverage, the death of one partner can result in financial disaster for small businesses. Fortunately, the availability of low cost term life insurance makes getting proper insurance coverage affordable for even very small and new businesses.
By taking out inexpensive term life insurance policies on each partner, entrepreneurs can make sure that their company will have the funds needed to carry on even if one of the owners passes away. When the decision is made to purchase key person insurance, the owners need to draft a formal agreement regarding how the proceeds will be used if one of the partners dies. Typically a portion of the money stays with the business, and some of it is used to purchase the deceased partners stock from the estate, per the terms of a buy-sell agreement.
Business Life Insurance for Partners and Succession Planning
When you go into business with other people, it’s important to stop and think about what might happen in the event that you or one of your partners passes away. It’s one thing to start and run a small business with a particular person that you know and trust, but it’s another matter entirely to find yourself owning and operating a business with one of your partner’s heirs in the event of his or her death. However, if one of your partners dies and you don’t have a legally binding agreement about what will happen with his or her stock shares, that’s exactly the situation you’ll face.
That’s why it’s so important to have solid, sound buy-sell agreements in place as soon as you take on a business partner. When you go into business, you’ll want to draft a legally binding document that specifies exactly what the partners can and cannot do with their stock. If the partners agree that stock should not be assigned to heirs, the agreement will stipulate that the corporation will buy back outstanding shares in the event of an owner’s death.
Of course, it’s important to have a guaranteed source of funding, so you won’t have any problem buying back your partner’s stock from the estate should the agreement need to be enacted. That’s why business partners and life insurance for business owners go hand in hand. It’s important to take out a key person insurance policy on each of your company’s partners. With proper life insurance in place, there will be no worries about how to enact the buy-sell agreement should the need arise.
Protect Your Business with Key Person Insurance
When you go into business with partners, you and your co-investors are very dependent on each other — in terms of both finance and a shared workload. Whether your company is just starting or you’ve been in business for years, it’s important to make sound decisions about business partners and life insurance. When you take out key person life insurance policies on each partner, the company will receive a lump sum life insurance payment in the event that one of the covered individuals dies.
Typically, surviving partners use proceeds from key person insurance policies to purchase outstanding stock shares per the terms of the company’s buy-sell agreement, to hire someone to handle the day-to-day duties performed by the deceased partner, and to take care of other operating expenses. When thinking about whether or not you can afford key person life insurance, it’s important to stop and ask yourself, and your partners, if you can afford to go without this important protection.
Top Reasons for Purchasing Key Person Life Insurance
Wondering if you and your business partners need to invest in key person life insurance? While it’s fairly common for new small business owners to wonder whether or not they can afford life insurance, it’s actually more important to think about whether or not your business venture can afford not to have proper insurance in place. There are several reasons why inexpensive term life insurance should be included in the budget for just about every business:
- Replacement Planning: While no one wants to believe that they, or one of their partners, might die, it’s a fact that no one lives forever. Many small business owners work without drawing salaries, particularly during the early stages of launching a new business. What will happen if your partner is no longer with you? No one else will work without pay, so you’re likely to have to hire someone to handle that person’s part of the work load. Proceeds from an inexpensive life insurance policy can provide the funds you need to hire someone to help keep the business going.
- Stock Repurchase: It’s common for business partners to put buy-sell agreements in place that govern what each owner can and cannot do with his or her stock shares. Typically, these agreements specify what will happen with each partner’s shares when he or she passes away. Often, these agreements specify that the corporation will purchase the shares from the individual’s estate. This purchase can be made with proceeds from the key person life insurance policy, rather than placing the remaining partners in a difficult financial situation if such protection is not in place.
- Family Protection: In many cases, business owners invest a large portion of their personal and retirement savings in getting their businesses up and running. Getting an inexpensive term life insurance policy can be an important step in making sure that family members aren’t left penniless or in debt if the entrepreneur passes away before the business becomes successful.
Deciding How Much Business Life Insurance you Need
When you’re shopping for life insurance for your business, you’ll quickly learn that the amount of coverage you purchase will have a significant impact on the cost of premiums. The more coverage you want, the higher your premium payments are going to be. While the idea of cheap life insurance can be appealing, you certainly don’t want to find yourself facing a situation without sufficient coverage to meet your needs. It’s important to make sure that you have enough life insurance in place to protect your business in the event that one of the owners or other key person dies, but you certainly don’t want to pay more for premiums than is necessary.
To decide how much insurance you need, it’s important to think about how the policy proceeds will be used. For example, if you’re going to have to hire someone to replace the deceased individual, consider the recruitment and salary expenses you’re likely to incur. Further, if you’re planning to use insurance money to purchase stock from an individual’s estate, you’ll want to make sure the policy amount is sufficient to cover the cost of that stock, whether it’s based on fair market value or a preset amount specified in the terms of the buy-sell agreement. Each company’s needs are unique, and it’s important to give serious thought to exactly how much life insurance you really need before making a final decision.
Finding Affordable Business Life Insurance
When you’re in the market for business life insurance, it’s important to shop around to make sure you are getting the best value for your money. Many different companies offer policies, and you’ll find options ranging from cheap term life insurance plans to significantly more expensive whole life insurance policies. When shopping for affordable business life insurance policies, it’s a good idea to get quotes from several different companies.
The only way you can be sure that you’re getting the best value is to be able to compare a number of alternatives. Don’t make your decision solely on price, as there are often significant variations in coverage among policies. While you shouldn’t automatically choose the cheapest policy, it’s also not advisable to assume that the most expensive policy is your best option. Be certain that you understand exactly what type of coverage you are getting, how long it will be in effect, and under what circumstances the premiums can change or the policy can be cancelled.