Life Insurance for Business Owners
Life Insurance for Sole Proprietors
Life Insurance for Business Partners
Key Person Term Life Insurance Plans
Life insurance for Business Owners and what small or medium size businesses need to consider to ensure their business continues should a death happen to a business owner, partner or Keyperson.
Overview of Article
I wanted to cover a couple of common situations and provide some common life insurance strategies. As is the case with most businesses, each will have its own set of circumstances so each case should be looked at separately and not every general solution is going to fit every need.
Life Insurance for owners : Sole Proprietor or Spouses owning a business:
As a sole proprietor you should consider what would happen if you unexpectedly die. Does this mean no more income for your spouse, children etc? Who is going to pay off any company debt, if any? If you are a sole proprietor a standard Term Life Insurance Plan will generally handle these situations.
Spouses owning a business will have the same questions as above but with a few additional considerations:
1. Does the surviving spouse wish to continue with the business? If so how much money will be needed to pay off existing debts? Do you need to hire an employee to handle your spouse’s previous duties? Does the surviving spouse have enough coverage so they can focus on keeping the business running and not worrying about home finances?
2. What if one of the spouse’s is injured and cannot work for a period of time? Should you consider adding a Disability rider to your Term Life Insurance Plan?
Life Insurance for Partners : Businesses with Partners and Buy Sell / Business continuation agreements.
In a Partnership business, the general need for life insurance is the same:
Each partner has a life insurance policy that will cover their equity in the business. Upon a death, the policy will pay the spouse, of the surviving partner or children etc , a pre-determined amount of the life insurance policy funds. These terms are set forth in a Buy/Sell or Business continuation agreement. The funds may be split between the business and the surviving spouse.
Purchasing a Life Insurance policy, for a Buy/Sell agreement , is generally referred to as “Funding a Buy / Sell Agreement”. The company pays for the policy and is the owner. The Spouse, Children etc. are the Beneficiaries of the funds.
All partners need to agree to the value of the company. It is a good idea to review this valuation every few years. Yes, this means if your company’s value greatly increases you should consider getting new Life Insurance plans and yes, you will have to go through the underwriting plan once again. But it’s worth it to avoid any problems down the road , especially if you are meeting your goals and the company is thriving!
You should also consider a Disability rider/policy in the event a partner is unable to work for a period of time. This could allow you to hire someone to handle their duties or offset a salary that may still need to be paid.
One important thing to remember, when you are valuing your company, the insurance carrier may want to see Financials to insure there is financial justification.
Keyperson Life Insurance Plans
A Keyperson is not a partner but rather a very important person in the business. If they should die or become disabled for a period of time, their loss will greatly impact your business. You need to know what it will cost you to replace someone on a full time or part time basis. These would be a standard Term Life Insurance policy with , perhaps, a disability rider. A No Medical Term Life Insurance plan , depending on the Term Amount, might be another alternative.
These policies are generally owned and paid by the company. The company would also be the beneficiary.
You must get a written consent that you are getting a Key Person policy on someone or there could be some Tax consequences. Click HERE for an article that discusses this situation.
Small and Medium size businesses keep our country going. But a business needs help to keep going after the loss of someone vital to the company. Life insurance for business owners is a strategy that you need to understand and you need to implement to insure your company can survive if a Keyperson or owner suddenly dies.
Contact me today for a free no obligation consultation. My number is 512-963-5000 or use my contact form , to the left , and I will contact you directly.