Life insurance offers benefits to business owners

Janet Arrowood

What would happen to your business if you die unexpectedly? Could your business be sold quickly and for a fair price? Have you set aside enough money to take care of your family? Is there someone in your family who’s qualified, willing and able to take over and keep the business running?

If your answers to these questions are no or probably not, you might want to consider some type of life insurance to cover the shortfalls.

Life insurance offers some advantages to business owners. If you’re the business, your firm could have little or no value without you. Selling the business, especially if your heirs need a quick sale, might not be an option or could generate little cash.

You might have retirement savings. But will they be sufficient to provide for your family? Do you have substantial savings and investments outside your business so your family will have the resources it needs?

Is your business one that only a licensed or otherwise specially qualified person can operate? Many professional practices — including accounting, legal and medical firms — require the principals and owners to have proper qualifications to operate the businesses.

Do your heirs even want to take over the business? Are they qualified to do so? Do they have any idea of the financial, logistics and other aspects of the operations?

If your answers to the preceding questions are negative, here are a couple of ways you could use life insurance to protect your family and ensure the continuation of the business you worked so hard to build and grow.

Establish and fund a buy-sell agreement. This option ensures there’s an immediate, qualified buyer for your business or your interest in the business.

The normal way to fund this agreement is through the use of first-to-die life insurance if there’s more than one owner or an outsider is going to buy your share of the business. This type of insurance pays when the first person in a group of two or more insureds dies. The funds enable either the remaining owners to buy out the deceased owner’s share from the heirs or enable an outsider to buy either the deceased’s share or entire business.

If there are more than two people covered by the policy, there could be an included option that reconstitutes the policy to cover the first-to-die out of the remaining insureds.

Purchase enough personal life insurance it doesn’t matter what happens to your business when you die.

If you have a young or growing family, making house payments, paying for college tuition or have little to no financial resources, personal life insurance could ensure your family is able to continue its lifestyle without trying to maintain the business or your share of the business.
If your business or interest in the business can’t be readily sold or fetches little money, insurance replaces your income and keeps the family lifestyle intact.

Depending on your needs, risk tolerance and available funds to pay premiums, there are many life insurance policy types from which to choose. The least expensive option is a term policy. Since there’s no cash value accumulation, the premiums can be low  — especially for younger, healthy people. You can obtain a policy with a premium guaranteed for anywhere from one year to 30 years or more.

Term life insurance policies come in two main types: annual renewable term (ART) and level term. The ART variant starts with a low premium, but increases by a known amount each year. As long as you pay premiums on time, the insurance should stay in effect as long as it is needed. Level term has a set premium for the duration of the policy length you choose. The most common lengths are five, 10, 15, 20 and 30 years.

Other life insurance options include whole life policies and their variations. This type of insurance offers advantages over term life insurance, but the annual cost could be prohibitive.

Before making any life insurance-related decisions, always consult a licensed life insurance agent and your tax and legal advisors. This column should not be construed as business planning, insurance, legal or tax advice.