Business Uses for Life Insurance to Help Businesses Keep Running
There are many uses for life insurance – both for personal and business planning. In fact, putting certain life insurance policies in place can help to keep a business stable and ongoing even after the loss of a key individual. This is especially the case for smaller companies as the loss of just one person can have a devastating effect on the company overall.
There are several different strategies that can be used to make sure that funds are available should a business owner, partner, or key executive pass away unexpectedly. Some of the primary techniques include the use of key person life insurance and cross purchase agreements.
Using a Key Person Life Insurance Strategy
The death of a key person in a business could essentially lead to the company’s demise. By having a key person life insurance strategy in place, funds can be made available to keep the business afloat until the company is sold or until a suitable replacement is found.
Typically, key person life insurance covers the owner of a business, as well as other partners or certain top employees. With this strategy, the business will pay the premiums on the coverage, and it will also act as the beneficiary on the life insurance policies. In this manner, the company will actually receive the proceeds of the policy if a key person passes away.
The funds that are obtained from the life insurance can then be used for a variety of purposes such as paying off business debts, distributing money to investors, or even paying for every day expenses of the company.
The premium payment and the death benefit proceeds can also be split between the business and the spouse (or other survivors) of the key person. In this scenario, the insured’s survivor (or survivors) will receive funds to help make up for the loss of the insured’s income. As with other types of life insurance, the insured’s personal beneficiaries can use the funds to pay off a mortgage, fund the future education of children, replace income, or any other purpose that they see fit.
When considering key person life insurance, there are several questions that should be answered in coming up with an appropriate amount of coverage. These include:
- What would happen to the business following the sudden loss of key individuals?
- How much revenue or income would the business lose following the owner or a key executive’s loss?
- How long would it take to replace such an individual?
- How much does the business pay out in overhead or other costs that would need to be immediately covered?
Cross Purchase Planning Techniques
Another business financial planning technique is setting up a cross purchase agreement. This method is also referred to as a buy-sell agreement. Here, the owners or partners in a business will enter into the agreement among themselves, stating that upon the death of one of the owners or partners, the other key individuals will purchase his or her share of the company.
With this technique, each of the individuals will purchase an individual life insurance policy on the life of each of the others. This helps to ensure that funds will be available to purchase the deceased person’s share. In the case of a business where stock shares are purchased back, each of the surviving owners or partners will have his or her share of the business ownership increased proportionately.
Other Business Uses for Life Insurance
There are other business uses for life insurance as well – including the attracting and retaining of good employees. When an employee benefits plan is offered that includes life insurance coverage, employees (and potential employees) know that their loved ones will have the benefits of financial security should the breadwinner pass away.
Depending upon the type and amount of life insurance that is offered, policies may also be used for offering supplemental retirement income benefits to certain employees. Because life insurance offers many tax advantages in the accumulation of cash value build-up, permanent policies can be an ideal product for high income earners – especially for those who are excluded from participation in retirement savings accounts like Roth IRAs.
For example, a life insurance retirement plan can provide such individuals with supplemental income by providing potential future market appreciation, as well as tax deferred accumulation of funds. The policy owner may also be able to structure a tax free payout from the life insurance policy via loans or cash value withdrawals.
In any case, life insurance should not be overlooked as an important business planning tool – especially given its ability to seamlessly keep a business running even after the loss of important owners, partners, and employees.