Owning a business can be like parenting. You’ve likely experienced many sleepless nights and spent a countless amount of energy on your “baby.” Like parenting, being a business owner can be an enriching journey and make life worth the trip.
To protect your business, you need the right mix of insurance. From the relationships that make your business run to the building it’s housed in, insurance can help prevent devastating financial losses or legal consequences. Let’s look at a few of the major life insurance strategies for business owners, and how you can protect your dream.
Buy-Sell Agreements
Uncertainty is a given in life and in business relationships. A buy-sell is a legal agreement between business owners, funded by life insurance, can help protect surviving partners in the event of untimely death.
Let’s look at an example of how a buy-sell strategy could work:
- Two partners start a business, each owning 50% of the shares. The company becomes successful and is one day valued at $10 million. The partners enter into a buy-sell agreement, and the company purchases a $5 million life insurance policy on each partner.
- One partner dies unexpectedly, and the corporation receives the $5 million payout. As per the buy-sell contract, they then buy out the deceased partner’s heir (his wife). The family is taken care of financially, and they don’t have to worry about running half of the company or selling it to a third party. And the company stays in the hands of the surviving partner, who knows it best.
There can be any number of partners in a business, so there are often more policies involved in a buy-sell agreement. Also, as the business grows in value, the owners should increase the life insurance policy commensurately.
Key Employee Insurance
You probably have someone whose absence could be hugely damaging to the company. If that person died, how much would that change things? Would production slow down or even stop? Key person insurance is for these situations.
This kind of life insurance covers the untimely death of someone who is invaluable and irreplaceable in the company. If you lose your “right hand,” you’ll either be headhunting someone new and training them or trying to get your remaining employees to absorb that key person’s duties. And no matter how you make up for the loss of this employee, the costs involved could be substantial. Key person insurance gives you the cash infusion upfront to help your business handle the transition.
Reward and Retain
What if you want to reward an employee for their instrumental role in the company? In a competitive job market, this strategy could be the difference-maker in retaining that key person. A life insurance contract offered as an executive bonus plan is one strategy to help accomplish this.
Your company may choose to retain a key employee through bonuses, and one way to do this is to pay that bonus (or part of it) into a life insurance policy. In this strategy, bonus money is used to pay the premiums on a life insurance policy — usually whole or universal life — and the employee is allowed to use that cash value and choose their beneficiary to receive the death benefit. The policy could also give access to the cash as it grows or at a specific time, such as at retirement.
Unlike other traditional qualified plans an employer might offer, using an executive bonus plan gives the owner control of who they want to provide this benefit to and how much they want to give. Since the bonus is being received by the employee as compensation, they also have some control over how they use the cash value and who will receive the death benefit — creating a win-win for both parties involved.
In the ever-changing landscape of talent acquisition and retention, it might be helpful to look at unique ways to keep that top talent around. It’s a great boost for morale and a gesture toward a positive relationship, telling your people you want them on for the long haul.
Estate Equalization
You won’t be in business forever, nor will you live forever. Estate planning is an important part of your overall financial approach and is especially crucial if you are a successful business owner. Let’s look at an example of how estate equalization could help benefit you, your business and your heirs:
- A successful entrepreneur with a large hardware store valued at $3 million has three kids, and the oldest is a natural to continue the business. The other children are not interested and have headed in other directions as fast as possible.
- The business owner talks with her advisor about estate equalization, a strategy that uses life insurance to help protect the business while providing equal inheritances for each of her children. Put simply, her plan leaves the $3 million company to the interested child, and she then takes out two $3 million life insurance policies on herself, naming her two other children as beneficiaries. When the owner dies, the business will go to the oldest child and the insurance payouts will go to the other children, equalizing the estate.
- When the owner retires, the oldest child will take over the business and pay the premiums on the life insurance for his siblings with the proceeds from the business. He is essentially “inheriting” his part of the estate before his parent’s death and paying the life insurance premiums to contribute to an equal share for his siblings.
This strategy can help sidestep some problems with distribution and family dynamics. If the three children were to become three-way owners of the estate, there’s always the danger of a rising tension about who’s not pulling their weight. It also alleviates the issue of one child not having millions on hand to “buy out” their siblings of their share and thereby needing to sell the business.
Estate equalization can also allow for more money to be passed on. In this example, rather than $3 million split three ways each child ends up with $3 million in cash or assets.
Your Business Is a Dream Worth Protecting
These are just a few of the insurance needs and strategies available to business owners. Your business most likely started with a dream, and it’s a dream worth protecting. But running the business and eventually passing it on can create complex, emotional situations. Having financial measures like insurance in place can help give you confidence.
How can we help you? Our knowledgeable financial advisor team is up to date on business laws and methods for wealth optimization. We also have an insurance team who can review your coverage to assure your business – and your family – are covered and cared for.
Get in touch today for an insurance review for you and your business.
Matt Lewis is a non-registered affiliate of Cetera Advisor Networks, LLC.
