Life insurance for business owners
As a business owner, you may need to protect your legacy and the enterprise you've built. Having a strategy that includes life insurance can be an important step in implementing a succession plan and allowing for continuity, while preserving the value of your business.
Key Person
Protect your business in the event of the loss of an executive or other top contributor, providing cash to find their replacement, replace lost income or keep the business afloat
Buy/Sell
Access liquidity to buy out business shares in the event one of the business owners dies, and redistribute shares to remaining owners
Key Person Insurance
Within the business landscape, every employee holds significance, but certain individuals are indispensable. Whether it's their reputation, name recognition, skill set, or client connections, the departure of key employees can profoundly affect an organization. Recognizing this vulnerability, many companies opt for key person insurance, offering a crucial financial safety net to stabilize the business as leadership navigates a path forward.
How does a key person life insurance policy work?
Key person insurance is a life insurance policy uniquely crafted to financially compensate a business in the event of the insured person's death, rather than benefiting the individual's heirs. This "key person" might be an owner, partner, or an invaluable employee possessing specialized knowledge or skills. It could also extend to an individual responsible for a significant portion of the company's revenue. Typically reserved for employees whose departure would pose a substantial financial burden and prove challenging to replace, these policies offer crucial funds. They help ensure business continuity in the face of a key employee's death or disability, especially when the policy includes an additional disability rider.
The business owns the policy, but the employee has to consent
Usually, life insurance policies are owned by the insured individual or a family member. However, when a business owns the policy and covers the premiums, it falls under the category of company-owned life insurance (COLI). If the insured person passes away or becomes disabled, the business becomes the beneficiary, receiving the death or disability benefit. It's important to note that obtaining a COLI policy for a key employee requires the written consent of the individual being insured, a prerequisite mandated by life insurance companies.
When should a business consider a key person insurance policy?
Businesses should consider key person insurance when:
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When seeking a business loan or financing, as lenders or investors may require it.
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When the business heavily depends on an individual's name, reputation, skills, or financial stability.
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If the loss of a key person would have a substantial impact on sales or financial stability.
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In the case of a sole proprietorship, when there's a desire to provide a payout for closing the business and settling debts in the event of the owner's untimely death.
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In a partnership scenario, when partners seek funds to buy out each other's shares in the event of one partner's passing.
Buy/Sell
What Is a Buy and Sell Agreement?
A buy and sell agreement, also known as a buy-sell agreement, is a legally binding contract outlining the reassignment of a partner's business share in the event of their death or departure. Typically, these agreements specify that the share will be sold to the remaining partners or to the partnership itself. Life insurance policies are commonly employed in buy-sell agreements to financially support the potential buyout in case of a partner's demise. Other terms for a buy and sell agreement include buyout agreement, business will, or business prenup.
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Buy/Sell Key Takeaways
• Buy and sell agreements outline the process for transferring a partner's business share upon their death or departure.
• Such agreements may also define a methodology for assessing the business's value.
• Cross-purchase and entity-purchase (redemption) are the prevalent types of buy and sell agreements, with some incorporating elements from both.
• In cross-purchase agreements, remaining owners have the option to purchase the interests of a deceased or selling owner.
