Welcome to STA’s most recent blog with the goal to clear away the financial fog!
This week, we explore a specialized “area of interest” in life insurance for entrepreneurs.
Life Insurance can be intimidating to newcomers in its policy variations and coverages.
Put Simply: In the event of your death, your loved ones (beneficiaries) are protected from financial burdens (both expected and unexpected) by receiving an insurance payout (per your qualifying incident).
This provides peace of mind when considering the costs of “final expenses,” your personal debts, and the financial restructuring of your family after your departure.
If you are an entrepreneur, however, you may recognize that your death or absence also has a profound effect on the ecosystem of your business.
Much like how the sudden death of a breadwinner could disrupt the financial balance of a family, a business that's just lost its owner or operator can run into financial and operational issues -- It may not recover fully without them, at all!
If you have business partners, it’s both financially sound and operationally imperative to have Life Insurance policies to protect your company. Individual policies protect a partner’s loved ones, but you’ll need one specific to the business partners (and your business) to help mitigate and recover from your loss.
Policies can be enacted where your business partner(s) is named a beneficiary(ies).
This is distinct from any Individual policy you should already have with your spouse, children and/or other family as beneficiaries.
This would allow your partner(s) to manage and recover the business in your absence, "buy out" your share (or, coordinate legacy plans with your heirs).
It’s a really familiar comparison: a business and business relationship being like a family unit.
Key Person Life Insurance
There is another type of small business insurance called “Key Person Life Insurance” where your business itself (rather than a person) is the beneficiary. This benefit supports your business with funds if a “key person” such as you/the owner (or that 75-year-old employee who “came with the keys” and has seen the company since its first day) passes unexpectedly.
This can help alleviate lost sales or revenue and give your successors time and resources to recover and arrange the next steps for your business. This form of insurance has very clear benefits in a Partnership structure -- it’s an added benefit to the original policy for your partner (like double protection for your business).
Buy-Sell Agreement
Another form of death protection in a Partnership is called the “Buy-Sell Agreement.” This is a contract between you and your business partner, which you can use Individual Life Insurance to fund.
Here, if one partner passes away, the contract allows the living partner to “buy out” the other partner’s share of the business.
To ensure the partner has enough money to purchase the deceased’s portion, many business partners take out life insurance policies on each other.
If you create a Buy-Sell Agreement for “x” amount of dollars, and then take out Life Insurance policies on each other for a little over “x” amounts, upon one partner’s death -- the other would have enough to buy out the business from their estate.
This strategy is referred to as the “Cross-Purchase Buy-Sell Agreement” strategy for a business.
One thing to note: the premiums paid for Life Insurance of a Buy-Sell Agreement are not tax deductible, – but the death benefit is paid tax-free to the beneficiary.
Those business partners who are also married can see the potential here for amazing protection of all assets owned by one another and their companies. A Generational Wealth opportunity.
When it comes to Term or Whole-Life Insurance choices, it’s all about a “matter of feel.”
Whole Life is more expensive, but will provide a payout no matter when the insured person dies.
Term Life is less expensive, but you carry some risk if you don’t die within the coverage of the policy duration.
The factors that should affect this decision would be the age of those partners involved, the age of the business, and how long coverage is needed. Whole Life will give one another (and their families) peace of mind. Term Life can be a good option for a new company with less resources (at first), or certain older partners who may retire.
Also, check this out: “In some instances where a business owner owns the life insurance policy – rather than the business – the business may be able to deduct the premiums as compensation to the owner.”
Regarding generational wealth and insurance policies, the most significant point to close us out is this:
Whole Life insurance never expires, and always provides a death benefit. While the premiums are more expensive, it’s very much worth it in the long run.
With this policy, you accumulate a Cash Value that can be used during your lifetime. The policy both gains Equity, and eventually bestows your heirs with wealth.
You can take out a Loan on the Cash Value or use it as Collateral for financial gains/investment.
This ultimately means you can have a liquid reserve for things like opening a business, funding education, or purchasing Real Estate!