Life insurance can help protect the business after the death of an owner.
Those who run small businesses carry significant responsibilities at work and home.
If death or disability were to strike suddenly, it would place the financial security of their families and companies at risk.
Any surviving business owners or loved ones may be left scrambling to oversee operations while simultaneously grieving the personal loss.
To help minimize the financial struggles and demands of the business during such a time, business owners can utilize life insurance as part of their business succession and estate planning.
Life insurance can help cover business debts, provide a financial safety net, ensure a smooth ownership transition, and maintain cash flow.
Life insurance can protect your small business from being gutted after your death.
While employees of businesses often have life insurance benefits provided by their employers, business owners cannot rely on another person for such safety nets.
Failing to account for these vulnerabilities can lead to confusion in succession planning, financial stress on surviving family, business debt, and the business being sold to cover taxes or other liabilities.
Yikes!
Business owners can protect themselves, their fellow owners, employees, loved ones, and assets by utilizing life insurance policies focused on the business.
Key person life insurance policies will cover the loss of an owner or essential employee whose leadership, expertise, or financial contributions are critical to the success of the business.
The policy is owned and paid for by the company.
The business will receive the payout if the insured individual dies.
The policy funds can be used to hire a replacement, cover lost revenue, or settle business debts.
In small businesses where a single individual is responsible for the majority of revenue, this type of policy is critical.
A life insurance policy can also fund a buy-sell agreement to promote a smooth transition if one partner becomes disabled or dies.
How does this strategy work?
Each business owner owns policies on the lives of the other owners.
Should one of the owners die, the surviving owners can receive life insurance funds to purchase the share of the business belonging to the deceased owner.
Ultimately, this protects the business from financial or legal complications.
Heirs will receive compensation for the business asset while giving the company stability.
Two primary categories of life insurance are term and permanent life insurance.
What are the differences?
Term life insurance is more affordable and provides coverage for a set time.
These help cover more temporary business obligations and loans.
Permanent life insurance provides lifelong coverage and has a cash value component.
This type of policy can be used to provide liquidity for estate taxes or fund succession plans.
Assessing business needs will help owners choose the appropriate coverage for their circumstances.
Starting and growing a company often requires small business owners to take on hefty personal debt.
These debts must still be paid if the owner dies.
How can life insurance help?
Life insurance can help settle remaining payments on business property or loans to preserve personal and business assets.
Paying creditors with these funds can shield company property from creditor claims.
The surviving family will not bear the weight of these monetary obligations by using insurance funds for payments.
When a business does not have a contingency plan in place for the death of an owner, then clients and employees can quickly abandon the company.
Life insurance can provide cash flow for operations and payroll to retain key employees during the transition.
With financial security, the business can run more smoothly.
Having a life insurance policy can provide peace of mind to all owners, investors, employees, and clients regarding the ability of your company to survive unexpected losses.
When business owners have enough wealth to place them over the estate tax exemption threshold, life insurance policies can fund estate taxes.
The business can continue without impacting operations by having liquid assets available to pay taxes.
When life insurance is structured strategically under estate planning laws, it can provide tax advantages.
Life insurance can also reduce financial strain on heirs while supporting a smooth transition.
Strategic estate planning can protect the business so that it continues to be an asset for future generations.
Life insurance is an essential tool for those who need to protect a small business and the financial security of its employees, owners, and their family members.
Working in tandem with a seasoned life insurance professional, an experienced estate planning attorney can help you strategically incorporate buy-sell agreements, key person insurance, and other estate planning and business succession strategies to preserve the small business you created.
If you are a business owner who needs an estate plan, you can contact our Overland Park estate planning law firm.
If a critical employee or essential company owner dies, the company with key person life insurance will receive financial support to minimize the negative impact of this loss.
Using life insurance policies to fund a buy-sell agreement helps to stabilize the business operations while providing for the deceased owner's family.
Many business owners take on debt to start their company.
With life insurance, payouts can cover these outstanding loans and obligations.
Business succession planning gives owners and employees more financial and operational stability.
Life insurance can be used to pay estate taxes and prevent the need to sell all or part of the business to pay debts.
In short, proper planning pays off, but do not forget to leverage the miracle of life insurance to pay the freight when needed most.
This post is for informational purposes only and does not provide legal advice. You should contact an attorney for advice concerning any particular issue or problem. Nothing herein creates an attorney-client relationship between Harvest Law KC and the reader.
Reference: Thrivent (Nov. 2, 2022) "How Life Insurance Can Help Protect Your Small Business"
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