If you’re a
small business owner, chances are you’ve caught yourself, more than once,
dreaming about the future. You may picture yourself hobnobbing with industry
leaders, cornering the market with an innovative product or service, or
directing the work of hundreds of employees.
There’s
nothing wrong with this kind of musing, as long as you are willing to invest
the time and energy to achieve these dreams. However, entrepreneurs often fail
to consider a less cheerful scenario: what happens to the business if they die
suddenly. Then what would happen? Would your business close? Would it be clear
who controls the assets? Would your family’s interests be protected?
The best
way to avoid this troubling uncertainty is to have life insurance for your
business. And it may not be optional. Before making a business loan, many banks
require the business owner to have a life insurance policy. Typically it’s in
the form of term life insurance that covers the cost of the loan in the event
the borrower dies. The bank then is the beneficiary.
Life
insurance can provide for the successful liquidation of your financial interest
in the business, thereby protecting your heirs. If your employees are scheduled
to assume ownership following your death, the insurance policy can be designed
to provide funds for the purchase of the business. In addition, the life
insurance policy can be used to pay the federal estate taxes on your estate. It
also can fund a buy-sell agreement between partners.
If the
business is to be sold outright after your death, the policy will provide
working capital for the transition period. The availability of a ready source of
cash will make the business much easier to sell. Assets are usually discounted
during such a sale and the availability of insurance funds will help your
heirs.
A related
type of insurance is “key person” or “key man” insurance, which compensates
your company for the loss of any other employee who is vital to the business
operation. The business has funds to tide it over while the business slows
down, and there are funds to apply to the search for and compensation of the
key person’s successor. For businesses with multiple owners, each partner
should have a life insurance policy to facilitate an automatic buyout of the
deceased partner’s interests.
You should
consult with your family, attorney and insurance agent when putting together a
sound life insurance program. And chances are your professional association has
an affinity program that offers affordable insurance.
To learn
more about business life insurance, business planning or business capital,
contact SCORE “Counselors to