By BILL WALTHOUSE
In any business, the death of a key person can seriously cripple stability.
Therefore, securing a life-insurance policy is an essential part of a business plan regardless of the industry served, and for many reasons.
For example, with life insurance in place, the business can use the death-benefit proceeds to help cover the expense of finding, hiring, and training a replacement, which is often a burden for even healthy companies after a loss.
Meanwhile, with many small businesses, oftentimes the key person is also an owner of the company. If an owner were to die, a life-insurance policy can help protect the remaining owners or employees from losing control of the business.
Another common use of life insurance for a small business is funding of a buy-or-sell agreement. Once an agreement is reached to sell business ownership from one party to another, the buyer can insure the life of the seller, so that if the seller dies before the planned completion of the transaction, the sale may be completed and the business survives.
Under a slightly different agreement, partners may insure the lives of each other, so that the surviving partner may buy out the interest of the deceased partner. This helps both the deceased partner’s heirs and the surviving partner. It also allows the business to continue.
Life insurance is also important for small businesses in need of collateral for loans. Lenders often require the business owner to pledge personal assets while applying for the company’s business financing. Assigning the proceeds of a life-insurance policy can fulfill part of this need. When the loan is paid off, the assignment can be dropped, and the owner can keep the policy and change the beneficiary.
Small businesses use life insurance in their employee-benefit packages, too. Whether it is a group policy for all employees or a deferred-compensation arrangement for key employees, life insurance can be a part of a benefits package that attracts and retains good employees.
It is easy to see that life insurance can be very important to a small business. Equally important for such companies is to work with an agent who understands these concepts and takes the time to gather enough information to help identify and recommend the best solutions.
As these examples clearly show, life-insurance policies do more than just provide a death benefit. Certain policies can address financial concerns such as cash for business needs or emergencies. Policies that accumulate cash value offer a combination of income-tax advantages, including tax-deferred cash-value growth, tax-advantaged distributions, and, of course, an income-tax-free death benefit.
Having the right protection and coverage with life insurance can bring peace of mind to any business owner. The right coverage will have different definitions depending on the stage a business is in. A business-protection plan and succession plan will vary through the company’s startup stage, growth stage, maturity stage, and, finally, transfer stage. Every small business should be able to answer the question, “do you have any plans for transferring your ownership of your business at retirement or at time of death?” Also, as the value of the business changes over time, ask, “have those plans been updated appropriately to keep in line with those changes?”
When was the last time you and your business had a thorough analysis of your insurance needs and a review of your existing insurance policies? September is Life Insurance Awareness Month. It is certainly a great time for small businesses to evaluate their needs.
Bill Walthouse, a producer for the Dowd Insurance Agencies, provides a broad range of insurance and protection strategies, including life, disability, and long-term-care insurance. Licensed to sell property and casualty products, he also manages client relationships, health plans, and employee benefits; (413) 538-7444; [email protected]