Most people understand the importance of life insurance for individuals and families. For businesses and business owners, however, life insurance is just as important, yet for some different and much more complex reasons.
Put most simply, life insurance is a financial foundation and versatile tool for a business – and this goes for businesses and organizations of all types and sizes. Life insurance policies, used wisely, can:
• Attract and retain top talent for a company
• Protect a company, its future, its employees and their families
• Otherwise help these same parties in a variety of ways
The following are just a few examples.
Funding buy-sell agreements
When one of a business’ partners passes away, an important use of a life insurance policy is as funding for a buy-sell agreement. In other words, in such a case, death benefits are utilized to buy out that partner’s portion of the company from their estate. Benefits could also allow a chosen successor to purchase the entire business. Such arrangements smooth relationships during a difficult time and help ensure that the company continues operating consistently.
When it comes to succession in a family-owned business specifically, a life insurance policy can be used to provide a death benefit for family members who will not be directly involved with perpetuation of the company. This benefit can be equal to the business shares left to the family members who will continue the business, thus “equalizing” the estate.
One way to attract and retain talent is to offer a life insurance policy to executives, set up so that it can be used as supplemental retirement funds, or just as deferred compensation for some other later use. With such policies, if something were to happen to that employee, the death benefits would go the employee’s beneficiaries – typically family members and typically income-tax-free.
Attraction/retention of employees via “golden handcuffs” funded by life insurance
Another way to attract – and especially retain – key employees is through a cash-value life insurance policy. In this case, the policy is set up so that it belongs to the company if the employee were to leave employment, making this option a way to pay a person more to join a company, but also help ensure that that person stays with the company for the long term.
Protecting against the loss of a key person
Almost any business, company or organization has key employees, without whom normal operations would be extremely challenging. Life insurance can be used to protect a company against the loss of such key employees. Set up correctly, the policy death benefit can equal revenue loss, administrative costs associated with seeking someone for the deceased person’s position, and so on.
Help with general financial obligations
With a whole life insurance policy, a business owner can borrow against its accumulated value for a number of purposes. For example, to help the company through hard economic times, to cover overhead, to provide additional cash flow, etc.
Making the Complex Simple
Life insurance is not only a necessity for individuals and families, but for businesses as well. With the right kind of life insurance policies in place, a company can be more attractive to prospective employees, more financially secure, more prepared for the future and more versatile when it comes to unforeseen financial needs.