Although there a numerous benefits that life insurance can provide for individuals and families, it can also be used to protect a business. For most business owners, one of the primary concerns is business continuity if an owner, partner, or key executive dies. Just as with individual situations, life insurance can offer a lump sum of cash to help solve immediate financial needs, as well as ongoing requirements.
Protecting Your Company with Key Man Life Insurance
Businesses are often faced with the dilemma of what would happen if a key individual should pass away suddenly. In almost all cases, the loss could cause a substantial negative effect on the operation of the company. To provide liquidity for situations such as this, a key man insurance strategy can be used.
When using this strategy, the business will purchase a life insurance policy on the owner, partner, or executive, naming the company as the beneficiary of the policy, as well as the payor of the premium.
If the insured dies, the company will receive the life insurance proceeds. Key man insurance can protect your company’s bottom line in both the short and long term. The benefits can be used for a number of reasons, including:
- Recruiting and training a successor
- Repaying creditors
- Pacifying lenders and convincing them of your company’s financial health
- Assuring employees, investors, and customers of the company’s survival
Key man insurance can also be critical if a business owner’s family members rely on the company as their main source of income. The policy proceeds can ensure that the business continues to provide for the family’s financial needs.
Using Buy / Sell Life Insurance Agreements
Without careful planning, the survivors in a business partnership may or may not be able to carry on following the death of another owner or partner. For example, survivors may not have complete control over the transfer of the business. A buy / sell agreement that is entered into with all business partners can help in clearly outlining the details of the business transfer, and can provide the surviving partners with the control that is needed to safeguard the company’s future.
Oftentimes, buy / sell agreements are set up as a cross purchase plan. Here, all of the owners of the business own a life insurance policy on all of the other owners. Therefore, if one owner dies, the life insurance proceeds from the policies that are held by the survivors will cover the cost of purchasing the deceased owner’s interests.
The policy ensures that each partner has access to funds to purchase the departed owner’s shares without compromising the company’s liquidity. This type of agreement is not typically used if there are multiple partners in the business, however, because purchasing multiple policies can be very costly.