Using Life Insurance in Business Succession Planning

When you started your business, all that you initially considered was how to succeed and keep from failing. The biggest concern was failure, not in how to ensure that the business survived after you passed on. However, now that your business is successful, you want to make sure that either the business continues to survive, or at the very least, that your heirs are fairly compensated by the partners when they take over the business.

In the situation where the business has two or more partners, the partnership or shareholder agreement will typically have provisions in it where the other partner(s) will purchase the shares of the deceased partner upon their death. That way, the same core group can continue to control the company. Unfortunately, when the unthinkable event occurs, rarely will you have the available cash to buy out the partners shares. This would require you to take out additional debt, and this adds more risk to your financial position. The company probably doesn't have the necessary cash reserves to buy out their shares either. This type of situation can throw the company into financial turmoil at the very least, or possibly even into bankruptcy.

One way that you can avoid this financial nightmare is to purchase term life insurance on each of the partners, and the surviving company owners will be named as the beneficiaries. This gives the other owners the necessary cash to be able to purchase the deceased partner's share. This keeps the company stable, and it allows the partner's family to receive the cash right away. If your agent structures the policies correctly, the premiums on the policies may also be tax deductible. Insurance proceeds are also tax free. From a taxation perspective, this type of arrangement can allow you to use a small tax deductable expense in order to later use a large tax free sum of money to finance this transaction.

Another thing to consider is key man insurance. We always make sure that we have the proper amount of liability coverage, as well as coverage from loss or damage of the business property. However, we often forget to get insurance coverage on our most important assets: our key employees and owners. If one of your key employees or owners were to suddenly die, your business could be negatively impacted. You may also lose a lot of your expected income, and you will commonly incur a considerable amount of expenses while recruiting, hiring, and training an adequate replacement.

Using key man insurance will not replace the work that they did, but the proceeds will provide funds for the following: keeping the business running, offsetting the expected loss in revenue, and finding and training a new person to take over their role.

Additionally, many times when a business tries to get a large business loan, the bank will actually verify that the company has key man life insurance in place before they issue the loan. This protects the bank from loss by ensuring that the death of one of the main people will not cause the failure of the business.

By taking these steps, you can ensure the long term survival of your company, as well as the ability for the firm that you build to outlive you. Many companies can provide you with quotes on term life insurance and key man insurance.

Multiple companies can offer you quotes on a return of premium life insurance policies.

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