How Life Insurance Policies Can Benefit Your Business

You’ve worked hard to create the business you own today. I’m willing to bet that if something happened to you, you don’t want all this effort to go to waste. Your business is part of your legacy, and you want to be sure it is handled in the way you see fit!

Life insurance policies can benefit your business in a number of ways. Let’s talk about some of your options!

If your business relies heavily on you as a prime resource, consider Key Person Insurance. Key Person Insurance is purchased by the company. The company pays the premiums, and the company will be the named beneficiary of the policy.

Key Person Insurance is useful when the success or failure of a business is heavily reliant on one person. If that person dies unexpectedly, the policy’s payout can help cover business losses suffered.

A Buy-Sell Agreement – sometimes called a Business Will or Buyout Agreement – is a legally binding document that outlines the intended purposes of a partner’s share of a business upon that partner’s death. In the process of creating the Buy-Sell Agreement, the overall value of the business must be established.

In many cases, the Buy-Sell Agreement stipulates that the other business partner(s) buy out the shares of the deceased. In these situations, life insurance policies are used to fund this buyout so that the partners don’t experience unexpected financial hardship. This also helps avoid costly legal battles or the heirs of the person’s estate arguing about what happens next.

If the business is owned by a sole proprietor, the Buy-Sell Agreement may name someone within the business who is to buy out the estate.

These agreements typically allow for one of two arrangements: a Cross-Purchase Agreement (partners buy out the deceased) or a Redemption Agreement. In a redemption agreement, the business entity would buy the interests of the selling (or deceased) owner. Some policies combine the two options, splitting predetermined amounts of the partners’ shares into a set split, with some to be purchased by the other partners and some to be purchased back by the business.

Whatever the preference, these agreements, when coupled with life insurance policies, enable the company (or its partners) to purchase back the shares by helping to fund that purchase.

Much like a Key Person policy, the Company-Owned Life Insurance policy is one taken out by the business, as a business expense, on an employee. The business is the beneficiary. The idea is that the proceeds from the policy, in the event of the death of said employee, would be used to replace that employee.

Sometimes abbreviated as a “COLI” policy, these life insurances are to ensure that costs the company may incur to replace the named employee are covered. Because some companies used COLI policies as a tax loophole, the COLI policies now are required to meet certain criteria to qualify as non-taxable funds.

If some of these concepts have you scratching your head, or if you simply need help making some of the difficult decisions that accompany these purchases, it is always best to seek an experienced and knowledgeable agent.

Please know you can call my office at any time to make an appointment. As an independent agent, I can shop around for you and help provide some options for your business.