Introduction
For business owners, planning for the future isn’t just about growth, it’s also about protecting what you’ve built. One critical aspect of this protection is preparing for the unexpected, including the potential loss of a key partner or owner. Life insurance can play a vital role in safeguarding your business, helping to ensure continuity, protecting your family, and providing financial stability in the face of loss. Whether it’s funding a buy-sell agreement or replacing lost income, company-owned life insurance is a powerful tool in a comprehensive business succession plan.
A way to help manage the risk
Company-owned life insurance is one way to help protect a business from financial problems caused by the unexpected death of a key employee, partner, or co-owner. If the covered individual dies, the proceeds from this type of insurance can help in several ways. Here are some examples.
Fund a buy-sell agreement
A buy-sell agreement typically specifies in advance what will happen if an owner or a key person leaves the company, either through a personal decision or because of death or disability. The death benefit from a company-owned life insurance policy can be used to purchase the decedent’s interest in the company from his or her heirs.
Keep the business going
If a decision is made to continue the business, there may be a period when operations cease while the survivors develop a plan to move forward. The death benefit can be used to help replace lost revenue or to pay costs associated with keeping the doors open, including rent, utilities, lease payments, and payroll. It may also help the surviving owners avoid borrowing money or selling assets.
Replace lost income
If a business owner has family members who depend on the income from a business, which simply could not continue if he or she were suddenly gone, the proceeds from company-owned life insurance could help replace the lost income and help protect the family’s quality of life while they adjust and move on.
The appropriate coverage amount will depend on several factors. It could be a multiple of the business owner’s annual salary or the company’s operating budget. Don’t forget to factor in such details as the cost of hiring and training a successor, where applicable, and any debts that the family may have to repay.
A thorough examination of a business and the related personnel should be conducted before the exact amount of coverage is determined.
Remember that the cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that the individual is insurable. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have contract limitations, fees, and charges, which can include mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.
The loss of an owner can be devastating to a small business. A company-owned life insurance policy may help reduce the financial consequences if such a loss were to occur.
Conclusion
The unexpected death of a business owner or key employee can cause major financial disruption, but life insurance can help mitigate the risk. By funding transition plans, covering ongoing expenses, or replacing lost income, company-owned life insurance offers both protection and peace of mind. With thoughtful planning and the right coverage in place, you can help preserve your business’s legacy and ensure your loved ones and partners are supported—no matter what the future holds.
Scarlet Oak Financial Services can be reached at 800.871.1219 or contact us here. Click here to sign up for our newsletter with the latest economic news.
Source:
Broadridge Investor Communication Solutions, Inc. prepared this material for use by Scarlet Oak Financial Services.
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances. Scarlet Oak Financial Services provide these materials for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
