Small Business Owners Guide to Life Insurance
Life Insurance is the most important insurance coverage a small business can purchase as it pertains to perpetuating the business. (General Liability Insurance is the most important operational insurance coverage). When a person dies unexpectedly the loss of life has repercussions far beyond just the immediate family. This is especially true if the person was a business owner or the key member of a business.
Some of you are nodding and agreeing with me, and saying to yourself;
“If we lost so-and-so our entire business would be turned upside down. An appropriate amount of life insurance would certainly help us bridge the gap between losing so-and-so and hiring and training so-and-so.”
If you are in agreement, then you are an enlightened Insurance Soul, and you can simply skip down to the third section of this article if you would like.
And some of you may be reading this and saying to yourself;
“Life Insurance is a waste of money. Our business could survive if we lost the owner, he doesn’t really do anything anyway…”
You have some research to do, and you should pay special attention to the next section of this article.
Learning about Life Insurance the Hard Way
Let’s say that you and your business partner own a successful local business, that employs a dozen or so employees, and have a great relationship with local suppliers and distributors. You have been in business together for the last 20 years and have a strong presence in the community and are the leaders in your industry. Both you and your partner share a common vision for the business, things are going well, sales are growing and life is good.
Then you get the call you would never recover from. Your business partner has passed away suddenly in a car accident. A few months later you receive a call from your late partners spouse, and she wants to come in and have a meeting to discuss the future of the business.
After a lengthy and emotional meeting you find out your business partner has racked up mountains of personal debt financing some property deals on the side that never really worked out, and has accumulated a ton of personal debt outside the business. Your former business partners spouse is now getting anxious to pay off all of the outstanding debt, and has demanded you sell the business to pay off all the outstanding personal obligations. Now as a 50% stakeholder in the business she has every legal right to make the demands. So your only choice is either to take on an incredible amount of debt to buy out the shareholder, or you have to sell the business, that you have worked so hard in building…
Either way, Life is not good anymore… You may have wished you had listened to your Life Insurance Professional about placing a Buy-Sell Agreement in place, funded by a Life Insurance Policy.
3 Types of Business Life Insurance
Individual Life Insurance
In the purest form, Individual Life Insurance is coverage for the business owners family, and not the business itself. The importance of an individual Life Insurance policy, is that it will protect the family against a distressed sale if anything were to happen to the owner. In most cases, when a business starts out, it is the business owner, his credit and his personal guarantees that back the loans and lines of credit that support the business. When the business owner dies, the surviving family members normally would have to sell the business to cover any outstanding financial obligations of the business. This could very well cause a distressed sale situation, where the business may have to sell the assets for less than their actual value, simply to satisfy the financial obligations. A well designed Life Insurance policy that covers the balance of the loans and lines of credit will give the family Options, and would allow the business to sell for what its worth, and not at a “Fire Sale” price.
In the simplest terms, a Buy/Sell Agreement is a contract that is created so that a deceased partners share of the business is bought at a predetermined price using a well structured Life Insurance Policy. This is meant to protect the surviving business owner, in the event the family wanted to walk in and take over ownership rights from the deceased partner. It is their full legal right to do so, even if they may not have the desire or skills necessary to fill the shoes of the deceased owner. Life Insurance would be structured to buy out the Shares from the family, ensuring continuity in the current business, and the family gets the cash necessary to fulfill any financial obligations that may have been left behind.
Key Person Insurance
Key Person Insurance protects the business from the loss of a key Owner, Revenue Producing, or Highly Specialized employee, and the financial implications of that employee if they were to die. There are many unrecognized costs of losing an Owner or a Crucial member of the business. The business is at risk of losing clients, contacts or connections that drive revenue for the business. Additionally there will be costs involved in searching, hiring and training a person to fill the empty position. These costs can add up very quickly, and without proper Life Insurance to provide needed cash flow buffer, the costs associated could cripple a small business. Many business owners are now also intrigued by Critical Illness Coverage in the event that a business owner does not die, but has a critical medical event like a Stroke, Heart Attack or Cancer. What would be the financial impact on a business if a Key Person or Owner was on sick leave for 6 months, a year or longer?
The Wrap Up
Life Insurance may sometimes seem like a Headache, and may be hard to rationalize spending money on it. But the truth is, Life Insurance has the power to change the course of the lives of the people you care most about, and the business you have spent so much time building. Your Family and your Business deserve the protection only Life Insurance provides. Put your mind at rest, do the right thing, and talk with a Life Insurance Professional today…