Strategies to help protect your business against death, disability or departure.
As an entrepreneur and business owner, naturally, you want what is best for your company and employees alike. Although we don’t like to think about things like death, disability, or an unexpected departure of a key person involved in the business, these things happen. As a business owner you simply must plan for the worst, and hope for the best.
As a Financial advisor and Certified Financial Planner®*, I have experience in providing business owners with a comprehensive strategies that provide continuity and protect the business value should you as owner or a key person pass away or become disabled and to help retain the key players.
Let me assist you in breaking down the fundamentals in protecting your legacy.
Key Person Life and Disability Insurance
Protecting your business with key person life and disability insurance in the event of one of your key employees, or even you as a business owner passing away unexpectedly, ensures the value of your company doesn't decline. How Key Person insurance works is that the business typically owns the policy, pays the premiums and is the beneficiary. The insurance will be able to provide stability if a death occurs. The business would receive the policy proceeds and could use the funds to:
- Recruit a capable replacement
- Pay off debts
- Buy time until the business’ assets can be liquidated, and the business be closed
- Bear in mind, many family owned businesses rely on non-family employees for the company’s success. Purchasing Key Person life insurance on these employees will guard against financial loss due to their absence and ensure the business stays in your family.
In order to protect your family and ensure the survival of your business, having a buy-sell agreement, which is a legally binding contract stating that, at an owner’s death, disability, retirement or departure from the company, the owner’s interest in the company is to be sold back to the business or to the remaining owners at agreed upon terms. Basically, it requires the beneficiaries of a deceased owner to exchange company stock for cash and allows the remaining business owners to continue managing the company.
A buy-sell agreement is not only for the protection of your family, but is crucial in ensuring your business survives. If the company is small or a closely held corporation, a death could create a significant financial burden on your family. With a buy-sell agreement, the business and the remaining owners will have some peace of mind. A buy-sell agreement guarantees that a market and fair price for your business is sought and can set the value of the business interests for estate tax purposes.
Although there are a couple ways to fund a buy-sell agreement, life insurance is the best way to fund the agreement as it provides the immediate cash necessary for the business or the surviving owners to purchase the deceased’s interest. Also, be aware that in many instances, the cash surrender value in a permanent life insurance policy can also be used tax free via policy loans and withdrawals to assist with paying for a lifetime purchase of a business owner’s interest. Depending on the type of buy-sell agreement, the business or the individual owners obtain a policy on each owner ensuring that at death or disability, the funds needed to buy out the deceased owner’s interest are readily available.
Split Dollar Life Insurance
Split dollar life insurance adds tax advantaged savings features to the above-mentioned benefits the business might receive, should one of its key personnel die unexpectedly. Split dollar life insurance is when an employer sets up a permanent life insurance policy on a key employee and splits the premiums, cash value, and death benefit between the two. Split-dollar plans are frequently used by employers to provide supplemental benefits for executives and/or to help retain key employees. The agreement outlines what the employee needs to accomplish, how long the plan will stay in effect and how the plan will be terminated. It also includes provisions that restrict or end benefits if the employee decides to terminate employment or does not achieve agreed-upon performance goals.
These plans can also be set up between individuals – referred to as private split dollar, or by means of an irrevocable life insurance trust (ILIT). Being irrevocable, this simply means that once it’s created and a life insurance policy placed in it, you cannot take the policy back in your own name.
You have poured your heart into your business so I think it is safe to say that thinking about and implementing these types of strategies makes sense.
Thank you for reading!