Why You Need a Comprehensive Wealth Plan — and Where to Start
Talking life insurance can feel like a dark prospect for anyone. For business owners, aside from the emotional difficulty of end-of-life planning, life insurance may fall low on the priority list and outside of the budget amidst important daily tasks, operational expenses and growth strategies.
However, you’re doing your business a disservice if you don’t take great effort to ensure its continuity should you or another key player at your company pass on. Your business includes the people you employ, the community members you serve, any suppliers or vendors you partner with and any partners who share ownership of the company with you.
Planning for a business transition or succession doesn’t exclusively mean planning for end-of-life situations. Many business owners design their plans with retirement or family transitions in mind. However, you must account for various high-impact scenarios, such as you, your partner or a key person passing away. You must also prepare those who will take up responsibility in the absence of a key person.
In addition, if you have family members who rely on your income or who would take on your assets and debts, you want the appropriate insurance in place to support them should you pass on.
Here, we’ll cover life insurance essentials for business owners so you can be prepared for anything.
Key Selection Considerations for Business Owners about Life Insurance
Business owners have several options when it comes to life insurance. With each option, you’re helping ensure the financial security of individuals and operations that depend on you or another key person today. Strategic life insurance planning, along with transition and estate planning, will help protect your family, community and business.
To identify the right life insurance plan to include in your overall strategy, here are top considerations to add to your checklist:
- Insurance for Income Protection
You must consider life insurance that will cover your income contribution and help your spouse or family manage any relevant debt and financial obligations should you pass. You can also take out individual life insurance on your partner, and they you, whether it’s part of a buy/sell agreement or otherwise to help them carry on operations in your absence. - Key Person Insurance
Key person insurance is insurance paid for and owned by the business, and the business is the beneficiary. You can take this type of insurance out on individuals who are essential to successful operations of the business, such as you or your business partner. This gives the business and partner the financial cushion they need to work through next steps should a key person pass away. Additionally, if you have key persons who are properly insured, your business value may be higher.
Upon a business owner or key person’s passing, the insurance can be used for buying their portion of the business, paying off debts and loans, covering losses incurred due to their absence, investing in a new key person and compensating employees should the business have to shut down. - Insurance for Your Buy/Sell Strategy
Life insurance is often included in a business owner’s buy/sell strategy. The buy/sell agreement dictates what will happen to a partner’s portion of the business should they pass away. Life insurance included in this agreement is intended to cover the cost for the other partner to purchase that portion of the deceased partner’s business from their spouse or estate.
It’s not uncommon that a business’s buy/sell agreement is five years old without an updated value. To ensure you have the correct amount of coverage, it’s important to have an up-to-date business valuation. - Transition Planning
Transition planning is an essential consideration when you’re deciding which life insurance is right for your business and family. You want to ensure you have the right coverage and beneficiaries to ensure continuity of your business and your family’s security should you, a business partner or another key person pass unexpectedly.
If your spouse is not involved in the business and you don’t have a transition plan in place with individuals trained and ready to take on their assigned responsibilities, there may be significant confusion if you pass. Additionally, if you don’t have the right coverage to fund the type of transition or succession you’re planning for, it may not be successful.
It’s important to have an updated business valuation and key players in place for whichever transition option you choose: selling the business altogether, selling and transitioning it to employees or passing it on to family.
Having such plans in place and the right insurance on key people also helps improve business value.
Term or Permanent Life Insurance?
Your options for insurance are permanent, such as whole life, and term, which has a set term length. Term is lower cost, but you don’t get the value back when the term ends. Permanent is more expensive, but it has cash value and you can use it during your lifetime.
Term is one of the more common insurances. However, permanent life insurance is becoming a more attractive option with the introduction of the Consolidated Appropriations Act, 2021. This act lowered key interest rates for such insurance policies to 2 percent – down from 4 percent. Now, insured persons can fund their policies more without a penalty from the IRS for violating modified endowment contract rules.
Because the death benefit is determined by the interest rate, with a lower rate in place, the cost of the insurance is now lower, which makes this more of a savings opportunity today.
Business owners can use life insurance to diversify their retirement plan.
Life Insurance Review
For verifying if your life insurance will perform as you need it to, you might consider a life insurance review. Our advisors can assess your current policies and plans and help you achieve optimal alignment. You may find that the way your policies are designed and beneficiaries assigned will incur more taxes than necessary and end up costing more in the end than you intended. Insurance options are ever evolving, so you may be missing out on new products and features that would benefit your business and family greatly.