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Your business and Life Insurance

Your business and Life Insurance

Your business is the result of your hard toiling, as you poured sweat, tears and blood in building it into what it is today. You definitely want your business to run when you are not there, without impacting any member of your family. Your life insurance coverage would provide the much needed protection to your heirs to face the challenge and pay off the associated expenses that come with your passing away. Without a life insurance policy, the heirs may be forced to sell the business. You must consider protecting your family and your business with the right kind of life insurance policy.

Buy / sell agreement

The buy / sell arrangement provides a contract with your business partner(s) to pave the way for smooth transfer of your business when you die as outlined in the agreement. In the contract, it is specified that soon after you die, the owner must buy your interest in the business and your surviving heirs must sell it. This type of agreement makes it easy for your business to carry on smoothly, and not put any kind of burden on your family as well as the heirs getting their proceeds from the sale of the business. Buy / sell arrangements are of three types. These are:

  • Cross purchase plan - in this type of plan, each of the owners applies for, owns as well as pays the premiums on life insurance on the other owners.
  • Entity Plan - here the business applies for, owns as well as pays the premiums on life insurance on each other.
  • Stock redemption plan - the plan makes the corporation to apply for, owns as well as pays the premiums on life insurance on each of the shareholders.
  • Wait and see plan - there are elements of cross purchase as well as entity plans.

Buy / sell plan is an effective way to ensure continuity of the operation of business in a smooth and hassle free manner after your death.

Keyperson life insurance

If a business is run mainly by one person, then in the event of premature death of the key person, the business would be significantly affected on its business operations. Here comes the need to have keyperson life insurance policy for smooth running of your business soon after the passing away of the key person. The death benefit amount is determined as one time income of the key person. However, other factors are also involved in increasing the amount (as for example, when it is difficult as well as costly to replace someone, any outstanding debts etc.). After the death of the keyperson, the proceeds of the keyperson life insurance can be used for:

  • Meeting business debts
  • Provide necessary cash to the business if there is a revenue shortfall
  • Leave for the surviving partner (s) working capital for running the business
  • Find and hire a replacement in place of the key person.

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