Three Things To Know About Being A Business Owner And Life Insurance!
Business owners and entrepreneurs are risk takers by their very nature. According to the SBA, in 2021 there are 32.5 million small businesses in the US, and they employ about 61.2 million employees.1 That’s a lot of risk takers!
Even though not all risks have the same inherent level of exposure, one risk that is often overlooked is what happens to businesses when the owner or key person suddenly passes away.
Unless cash is set aside for such an event, the business may cease to exist. This will impact the key people, their families, and employees. One extremely effective planning tool that can be utilized to create the needed liquidity is life insurance.
Similar to the uses of life insurance for personal needs, business owners can create the cash needed for a variety of purposes in the event of death of a key person. Below let's take a deeper look at three uses of life insurance for business owners.
1. Create liquidity for an estate
For business owners, the value of their business is often the largest portion of their estate besides their home. Quite often business owners during the course of operating the business will need to come up with collateral for a business loan. Owners may have used their home or other personal assets as collateral while the ultimate intention of those assets would be to pass to beneficiaries. Those beneficiaries will then need to have cash or assets to satisfy the liabilities if the business does not have the cash whether by selling the asset or paying off the liability.
Life insurance can solve that problem by creating the cash needed so the beneficiaries are not forced to sell. Another consideration is to equalize inheritance for beneficiaries. For example, when one child or family member is involved with the business and another is not. The business owner could equalize the estate by leaving the business to one and give cash equal to the value of the business to the other with the death benefit in a life insurance policy.
2. Fund a buy-sell agreement
A buy-sell agreement in and of itself is an important tool as it lays the groundwork for what to happen next for a business in the case of death, divorce, or retirement for owners. A well written buy-sell gives clear guidance as to how to continue to operate and who the next owners may be.
In the case of the sudden death of an owner, a funded buy sell with life insurance creates the needed cash to buy the deceased owners shares. The two common types of buy-sells are cross purchase and entity purchase. A cross purchase buy sell takes place when there is more than 1 owner and each owner buys a life insurance policy naming the other owner as an insured. In the case of premature death, the remaining owner has the means to buy the deceased owners shares.
This is especially important consideration if the remaining owner does not want to go into business with the deceased owner’s spouse or family members. An entity purchase buy sell funded with life insurance lists the business as the owner and beneficiary, and the business owner as the insured. The business now has the ability to buy back the ownership shares from the deceased owner estate and avoids the potential headache of unwanted new owner.
3. Cover lost revenue of a sudden loss of key employee or owner
Quite often the revenue of a business is tied to the owner or a few key people. Having life insurance on them helps the business in the short term continue to have cash available to pay expenses and payroll. This is a helpful tool to keep the business up and running while the logistics of how to move forward are figured out.
All of us at Creekmur Wealth Advisors want to make sure you understand your risk exposure and help you cover the bases, call your advisor to schedule time for an in-depth review.