One of the first things any business owner needs to consider is how to protect against events that may threaten the future of the business, like the death or disability of a proprietor, partner or key employee. When adversity strikes, a smart business-continuation plan can help protect business partners and family members alike.
Keep Your Business Alive
You might think that when you die, your family could maintain their income by running the business themselves or by hiring someone to handle the day-to-day management. The fact is, your loved ones may not have the skills or the desire for the job, and your co-owners may not welcome the idea of an unintended partner. A buy-sell agreement is an agreement between owners to buy out a co-owner’s share of the business in the event of that co-owner’s retirement, disability or death.
Buy-sell agreements are typically funded with life insurance policies, allowing remaining business owners to buy the company interests of a co-owner’s share, if he or she were to die, at a previously agreed-upon price. The amount is usually specified in a contract, which is created with the help of an attorney. This ensures that your business partners won’t have to scramble to come up with the money to buy out your share of the business and that your surviving family members will be fairly and promptly compensated for their share.
You can enter into a buy-sell agreement at any time, but it often makes sense to do so when a business is formed or when new owners are brought in. Because business values can fluctuate, it’s important to review the contract with your accountant at least once a year or to include a calculation method in the agreement that keeps it up to date. Also be sure the insurance coverage that funds the agreement is current.
Business owners should also insure against the risk of becoming disabled and unable to work. In this case, disability buy-out insurance would fund the buy-sell agreement, allowing the disabled owner to be bought out, typically after a one-year waiting period.
There is also business overhead insurance, which reimburses a business for overhead expenses in the event a business owner becomes totally disabled. A policy typically pays benefits for one to two years and helps cover expenses like salaries, taxes, employee benefits, rent, mortgage, utilities, equipment, malpractice premiums, etc.
You can enter into a buy-sell agreement at any time, but it often makes sense to do so when a business is formed or when new owners are brought in.
Insure Against the Loss of Key Employees
In a business, there are often certain employees who have a critical impact on the bottom line. Key person insurance is life or disability insurance purchased by the business on such an employee and payable to the business. The death or disability benefit can help make up for lost sales or earnings, or cover the cost of finding and training a replacement. An insurance professional can help you determine which employees, if any, are “key” to the business as well as evaluate how much and what kind of insurance should be purchased.
Protect Your Family's Future
Myriad factors make it important for you to consider purchasing individual life insurance that can provide your family members with additional money to pay off debts, cover ongoing living expenses and fund future needs such as college and retirement after you die.
Since you own this life insurance personally and it is not linked to the business, it can provide immediate financial support for your family. Also, an individually owned policy is typically creditor proof, meaning that the proceeds will flow directly to your family members and not to business creditors seeking to collect money they claim to be owed. Proceeds from an individually owned policy can supplement money that your family may receive from a buy-sell agreement that is funded by a separate life insurance policy. One of the biggest mistakes people make is not having enough life insurance coverage. Having extra coverage on your own can help safeguard your family’s financial security.
One of the biggest mistakes people make is not having enough life insurance coverage. Having extra coverage on your own can help safeguard your family's financial security.
Individually owned life insurance is particularly important for sole proprietors because the burden of providing for their families typically rests on their shoulders alone. In addition, these small-business owners often take out loans to help grow their businesses, and secure these loans with personal assets. Having the proper amount of life insurance can ensure that the family of a sole proprietor does not have to hastily sell the business, perhaps at a reduced price, to cover the debts and have money to pay for everyday living expenses.
Keep Your Plans Updated
Remember that as your business grows and your needs change, your buy-sell agreement and any insurance policies you have in place may need to be updated to reflect these new circumstances. For example, the people who were critical to your business when you first started and put these plans in place—from partners to key employees—may not be the same people that you rely on today for continued success. Your business advisors, including your attorney and insurance professional, can help you review your agreement and insurance plans to make sure they reflect your current situation.