If you’re a business owner, you have probably given some thought to your need for life insurance. Business owners have a more complex life insurance need than non-business owners. And what you don’t know could have a very negative impact on those left behind after your death. The number one thing that can jeopardize the business you have built is the lack of a succession of ownership plan upon your death. Although it’s not the only issue to be addressed, life insurance can play a critical role in the transition of ownership.
Who will own the business when you pass away? That will depend on what the ownership looks like.
- If you are a sole-proprietor, it would pass to your spouse, if you have one. If not, it would pass to your heirs as part of your estate.
- If the business is a partnership and your partner passes away, then the deceased’s spouse has just become your new partner. If they have no spouse, then the deceased owner’s children would be in business with you. I am sure you can imagine the potential problems with this.
- If there are more than two owners, things only get more complicated.
You probably see where I am going with this. The proceeds from a life insurance policy can help address the financial issues brought on by these situations.
- If you’re a sole-proprietor, can your spouse run the business without you? Would they want to? Life insurance would provide the financial stability for them to make those decisions.
- If the business is a partnership, a Cross-Purchase Agreement is a critical part of the ownership succession plan. Life insurance on each owner, with the other owner as beneficiary, would provide the funds to purchase the deceased partner’s half of the business from the surviving spouse or children. The Cross-Purchase Agreement can have language that commits the survivor’s spouse or heirs to sell their half in this situation.
- In a multi-partner business, the succession plan is more complicated. However, life insurance still provides the best vehicle for funding a deceased owner buyout.
In addition to the ownership of a business, there are sometimes key employees that are critical to the financial success of the business. Maybe you have invested a lot of money and time in their training. Maybe they have been with the business from the beginning and have the intangible qualities that would be difficult to replace if they passed away. Having a life insurance plan on a key person can achieve several goals. First, it could provide financial assistance to the key person’s family. Second, it could help the business sustain the income that may be lost because of the loss of this employee’s production. Finally, it could help fund the replacement and training of a new employee.
Life insurance may not be the only solution to the loss of a partner or key employee. It may not even be an option. If one of the partners is not healthy enough to qualify for life insurance the buyout proposition would have to be funded in a different way. Still, the issue of how the ownership transition can be managed without destroying the business must be addressed.
Small business owners are usually excellent at the work they perform. The weakness many of them have is in the details of the business operation. The legal, tax, and insurance issues are usually the areas where they have hired someone to help them. Most of the interaction with your CPA, insurance agent, and attorney have to do with the here-and-now issues facing your business, not the here-after.
Having a formal succession plan is important. A plan of any kind is of no use if it only exists in your mind. Just telling you family what you have in mind isn’t enough. You have worked hard building your business to provide for your family, your employees, and their families. If you have not considered the consequences your family and employees will face when you are gone, you need to.