Business Owners Need Life Insurance to Protect and Manage Risks
Key person life insurance for business owners
Key person insurance is a specific type of company-owned life insurance designed to help keep a business afloat even if the owner or another important employee dies.
“Business life insurance is just as vital for a business as individual life insurance is for a family,” says Warren Robbins, senior sales associate at Policygenius.
The business pays the insurance premiums and is the beneficiary of the life insurance policy. The death benefit can go toward:
· Business loans or losses
· Buying back the deceased’s shares in the business
· Covering cost of replacing the employee
· Severance to staff if the business closes
Buy-sell agreements and life insurance for co-owners
Buy-sell agreements are a must-have if you share business ownership. A buy-sell agreement dictates what happens to each owner’s share of the company if they leave the business. It’s like a prenuptial agreement for business partners: it sets the price and terms for the remaining partners to buy the deceased (or exiting) partner’s shares.
Adding life insurance to a buy-sell agreement simplifies the process by earmarking money for a buyout. This usually comes in the form of a cross-purchase agreement or entity purchase plan.
Establishing a buy-sell agreement allows you to set up a cross-purchase agreement, which adds life insurance policies into the buy-sell contract. Each partner purchases life insurance on the others. If one owner dies, the others use the death benefit to buy the deceased’s company shares.
Entity purchase plan
An alternative is to add an entity purchase plan to your buy-sell agreement. In this agreement, the business buys a life insurance policy on each owner, and uses the death benefit to purchase their shares if one dies.
Not all buy-sell agreements have to involve life insurance, but it’s recommended. If the surviving owners can’t buy back the company’s shares, it puts the business at risk.