Life InsuranceBusiness Owner Life Insurance

Life insurance can play a key role in the ongoing protection of your business operations, but also as it relates to succession planning – whether it will remain in the family or not.
Business Owner Life Insurance

How Can Life Insurance
Help Your Business?

As a business owner, you understand the hard-work, dedication, and commitment that goes in to starting, growing, and maintaining a successful business. As your business evolves, it presents different challenges to you as the business owner. Your operation may no longer be the small start-up it once was, instead, an established business with loyal customers and a growing staff. As you plan for the future of the business, you are likely considering your remaining years of active participation in the business, but also the long-term future, including succession planning.

Here are some common scenarios where life insurance can provide significant value:

Death of a key person.

As a small business owner, you, along with some of your employees may be critical to the success of your business. If a key person were to die, it could have significant short and long-term implications on the operation of the business. In order to protect your business, a key person life insurance policy will provide cash if the key person dies, to cover business expenses, debt payments, pay salaries, and allow you to find a successor to your key employee. Having a policy in place may even be a requirement if you borrow money from a lender as collateral. In most cases, key person life insurance is usually a term insurance policy, providing coverage for a set number of years.

Covering taxes on death.

One of the most common concerns of business owners, is the tax bill for their shares upon their death. When you pass away, you’ll be deemed to have sold your business shares, which will trigger capital gains and resulting taxes. The more your business has grown – and will grow in the future – the larger the tax bill at death. Including your business in your estate planning and purchasing life insurance can ensure that this financial burden isn’t passed on to your loved ones after your passing.

Equalizing an estate.

In addition to paying for the taxes incurred at death on the sale of the business shares, business owners with multiple kids might want to ensure equality in the legacy they leave for each child. If one of the children is actively involved in the business, and is expected to take over ownership of the business, it might be difficult to ensure other children are receiving their fair share of the estate value. If there are children not actively involved in the business, it usually doesn’t make sense to thrust them into the business, without adequate experience or knowledge, just to ensure equal treatment. It can result in tensions, poor business decisions, and eventually the failure of the business, not to mention the effect it can have on the personal relationship amongst the kids. An insurance plan allows the shares to be left entirely for the children involved in the business, and the cash payout from a life insurance policy can be left to the remainder of the children to provide equal value and maintain harmony in the family.

Transfer of control of the business.

Whether you are the sole owner of your business entity, or you have partners, planning for the efficient transfer of the business to another partner is an important planning consideration. In many cases, if the business has grown to a more significant value, the other partners or parties may not have quick access to cash required to purchase the business. They may also find that it is difficult for a business to obtain a loan after a key employee or an owner passes away, as it could dramatically affect the operations and lenders may not want to take that risk on. Taking the time to plan a proper buy-sell agreement or business succession plan will eliminate a lot of work in the future, making the transition much easier and more cordial. Life insurance policies play a key role in succession planning and buy-sell arrangements, as they provide the cash required for the purchasing parties to buy out the deceased owner. The business is protected, the new ownership can begin the next chapter, and the family of the former owner is also financially compensated as a result of the succession planning and life insurance protection.

How Would A Business Utilize
The Different Types Of Life Insurance?

Term life insurance

Similar to personal life insurance planning, term insurance is best suited for situations where protection is needed for a set period of time. For this reason, it is commonly used for key person insurance, as most key persons in a business will eventually retire or step back from their role. Coverage would be required up to the point in time where their loss would have a significant impact on the operations of the business. This may be right up to the date of retirement, or until a successor is properly trained to step into the role. It is also common to see term life insurance used in buy-sell arrangements where there is an expected date of retirement of the partners. Each of them would require protection in case any of the others pass away, but only while they are involved in the business – not for any subsequent planning.

Universal life insurance

Universal life insurance (UL) can provide permanent coverage for a business owner seeking the estate planning benefits or protection for a lifetime buy-sell arrangement. With the benefits of permanent coverage, and the flexibility of premium payments, UL can be a great solution for business owners that prefer a more customized and involved insurance plan.

Whole life insurance

Another option for permanent coverage is a whole life insurance policy, that provides coverage for life. This is also an effective tool for estate planning, and other lifetime needs, as it provides initial coverage and grows over time. With the growth of the policy, it can help increase the cash payout upon death as the business value grows. Compared to universal life, whole life requires less ongoing management, but provides less flexibility.

When planning for your business insurance needs, it is important to spend the necessary time and seek proper advice. Our team at Hometown Life Insurance has a wealth of experience in assisting business owners plan, protect, and secure their business. Working with you to understand your vision for the future of your business allows us to help you develop a transition plan to ensure financial security for all parties involved.

Business Owner Life Insurance

Other Questions
People Ask Us

Why do I need life insurance as a business owner?
  • Life insurance for business owners is extremely important. Proper insurance planning helps protect your family and loved ones, employees, business partners and any other parties that would be affected if you passed away. Having life insurance in place ensures that your family will have the funds to supplement the loss of income. If you have partners in your business or a goal of eventually passing the company on to someone else, life insurance can also help secure that dream. It is very important as a business owner to speak with a licensed professional at Hometown so we can help you plan for your personal and business insurance needs.
How much insurance do I need?
  • The amount of insurance a business owner needs is unique to your personal circumstances. Some of the factors that will affect the calculation include: the income you earn from your business, the value of your business, the future expectations of the business. Replacing your income for your loved ones is an important consideration to ensure they are not left in a difficult financial situation. The value of your business and the future goals will also allow us to understand the possible tax implications of your ownership in the business as well as the need for insurance to protect yourself and any other owners of the business in case one of you passes away.
Do I purchase the insurance through my business?
  • Analyzing whether your life insurance should be owned and paid for by your business is an important part of our review process. In many situations, this is a great way to pay the premiums with money that is taxed at a lower business tax rate compared to your personal tax rate. Spending the time to do a proper analysis will ensure that your insurance plan will meet your needs in the short and long-term, providing protection for those who would be financially impacted by your death.

Copyright © 2021 Hometown Life Insurance.

Copyright © 2021 Hometown Life Insurance.