Life Insurance for Business Planning
Overview & Policy Types
The role of Life Insurance in business
A Life Insurance policy is often the cornerstone of a business's succession plan. When a business uses Life Insurance as the funding vehicle of a Buy-Sell agreement, the death benefits are used to purchase a deceased partner's share of the business from their estate.
However, the uses of Life Insurance are wide and varied in their application as a business planning tool!
As the owner of a business, your clients know that their business is largely dependent on them. Life Insurance can financially protect their family, business, business partners, and employees in the event of your clients' untimely demise.
It is important to note that many business owners opt to have two different policies: a Life Insurance for business partners policy, where their business partner is the beneficiary, as well as a separate personal Life Insurance policy, where their spouse or family member is the beneficiary.
Beyond providing the basis of a succession plan for your clients business and of course ensuring that their families are provided for, Life Insurance can be used when taking out a loan for an existing or new business. It can also be used as an inducement for hiring and retaining employees. It can be used as a tax advantaged vehicle for retirement. Life Insurance can also be used to protect your business from loss in the event one of your key employees passes away, and on and on... we may continue.
Below we will delve into some of these strategies, explain their implementation, and how they are used to protect and enhance your client's business. Many of these strategies may use Premium Financing to maximize future gains while minimizing outlay from the business itself.
Key Person Life Insurance
Key person insurance is a type of individual Life Insurance where the business, rather than a partner, is the beneficiary.
Key Person life insurance provides a business with funds if an essential employee, such as the business owner, or top earner passes unexpectedly. According to LIMRA, “Approximately 20% of small firms pay for Life Insurance coverage through the business, for the benefit of either the company or the owner’s family.”
Setting up key person Life Insurance, where the owner is listed as the key person, can help replace lost revenue and give your business partner or spouse time to sort out next steps for the business. In return, taking out Key Person Life Insurance on a partner can make sure you’re protected in the same way.