Along with protecting your family’s financial future, life insurance can also be used as a tool to help ensure the continuation of a business. If a key employee were to die unexpectedly, the financial loss could potentially be devastating for the other partner(s). Life insurance can provide funds to a business owner’s spouse and heirs, protect his or her share of the business, and provide a way to attract and retain top talent that will support the continued success of the organization.
In the corporate world, life insurance is commonly used in key-person insurance, buy-sell agreements, succession planning, and executive bonuses. Here are some examples of how a business owner can use life insurance and how having coverage can help protect the financial future of a business.
Life insurance can be used in business partnerships to help protect the business, the deceased partner’s family, and the surviving partner. “Purchasing a departing owners interest is a paramount problem in any business. Fortunately, strategically structured life insurance can perform a double duty,” says Andrew Rinn, Sammons Financial Group’s Life Division Associate Vice President of Advanced Sales Strategy. “It allows the remaining owners the ability to continue the business while giving the departing owner and their family the necessary cash to meet their personal needs.”
Purchasing life insurance on a business partner is frequently used to fund a buy-sell agreement, where each partner or the business buys a policy on a partner. In the incidence that one partner passes away, the death benefit proceeds can be used to buy the other person’s share of the business; helping to reduce the financial hardship that could be caused by a partner’s sudden departure. A buy-sell agreement helps establish a clear plan on how to distribute the shares of the departed and allows the family of the deceased to turn their business interest into monetary value if they so choose. The remaining partner can also keep working in the business they helped to create. .
Business owners can choose different types of life insurance to fund their buy-sell agreement, including term, universal life, or indexed universal life insurance (IUL). Term insurance provides temporary coverage for a specific period, while permanent insurance offers lifetime protection. Discussing your goals with a financial professional can help determine which type of life insurance may be right for your particular situation.
Many businesses include life insurance as part of their employee benefits package, typically providing a death benefit equal to or double their annual salary. In addition, you can also recruit and retain talented employees by creating a compensation package that includes an executive bonus using life insurance. “This is a flexible tool to retain, reward and recruit a key employee,” adds Rinn. “Death benefit protection and tax-favored supplemental income can be the ideal strategy to keep top talent in your organization.”
For example, IUL insurance can provide a death benefit, as well as a “bonus” through the potential cash value generated during the lifetime of the policy. The employee can then use this cash value to supplement their retirement funds or for other purposes. What’s more, the bonus can be tax deductible to the company so long as it’s considered reasonable compensation. This provides a “win-win” for both employer and employee.
Life insurance can play an important role in a business succession plan. If a business owner has multiple heirs where only one will continue to be involved in the business, life insurance can provide a way to offer equal inheritance to all beneficiaries. “Life insurance can be an ideal tool to bridge the gap between generations of business owners,” says Rinn. “It provides the liquidity to equalize an inheritance to family members not interested in the family business, while ensuring the company passes to those that will carry on the family legacy.” Specifically, the death benefit of the policy can be used to pay the family members for their shares in the company.
Here’s a hypothetical example to explain how it works. Imagine you have owned a wholesale business for 30 years and want to leave it to your daughter to own and run in your absence. Your sons do not wish to be involved with the business, but you’d like your children to receive equal amounts as an inheritance. Your business is your largest asset and you would hate for your daughter to have to sell the business to provide her brothers with an equal share. A potential solution could be to purchase a permanent life insurance policy on yourself, with a death benefit equal to a multiple of the company’s value, and make your sons the beneficiaries of the policy.
Upon your passing, each of your children would receive an equitable distribution of the inheritance; your sons would split the death benefit equally, and your daughter would inherit and run the company business.
You’ve worked hard to build your business and you likely want it to succeed long after you’re gone. In addition to safeguarding your family’s future, life insurance can also help protect your business and your partner and ensure a smooth transition if the unexpected happens. Additionally, by including life insurance in your competitive benefits package, you can bring in top talent who will further grow your business and invest in the success of your organization. Consider contacting a financial professional if you’re interested in learning more about life insurance and how it can fit into your personalized business strategy.
Neither North American nor its agents give legal or tax advice. Please consult with and rely on a qualified legal or tax advisor before entering into or paying additional premiums with respect to such arrangements.
Life insurance policies have terms under which the policy may be continued in effect or discontinued. Permanent life insurance requires monthly deductions to pay the policy’s charges and expenses, some of which will increase as the insured gets older. These deductions may reduce the cash value of the policy. Current cost of insurance rates and current interest rates are not guaranteed. Therefore, the planned periodic premium may not be sufficient to carry the contract to maturity. For costs and complete details, refer to the policy or call or write North American Company for Life and Health Insurance One Sammons Plaza, Sioux Falls, SD 57193. Telephone 877-872-0757.
Indexed universal life insurance products are not an investment in the “market” or in the applicable index and are subject to all policy fees and charges normally associated with most universal life insurance.
The term financial professional is not intended to imply engagement in an advisory business in which compensation is not related to sales. Financial professionals that are insurance licensed will be paid a commission on the sale of an insurance product.