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Are Your Business Owner Clients Covered?
When most people think of life insurance, they think of it as something they need in their personal lives. But the benefits of life insurance extend way beyond the family unit into protection for businesses and key employees. Of course, life insurance is a valuable personal tool for income replacement to provide money for loved ones in case you die and cannot earn an income, for income creation to provide cash needed for final expenses at death, and for asset preservation to pay for estate taxes or to equalize the amount of an estate for multiple dependents. However, for your business owner clients - from medical practices to real estate companies to financial planning firms and beyond - life insurance has many practical uses and beneficial impacts. They must consider not only their personal financial needs, but also the needs of their business. After all, they are both a family provider and a businessperson. The number one use of life insurance for business is to fund buy-sell agreements. A buy-sell agreement lays out what happens if/when one of the business owners dies. It establishes the price of the business, identifies who the buyer will be, and mandates that the estate of the deceased must sell. While buy-sells may be funded with retained earnings, a long-term payout, or borrowed money, many business owners find life insurance to be a much better source of financing. Take the case of Anna C. Ewing. Ms. Ewing made a bundle in the carpet manufacturing business. Upon her death, her estate valued the business at $2,400 per share. Uncle Sam, though, had a different opinion: $6,530 per share. After seven years, six months, and 24 days, the court decided neither one of them was right and valued the business at $4,750, almost double the estate’s valuation! The worst part? Federal estate taxes are due within nine months of death. A buy-sell agreement funded by life insurance would have helped fix the value of her business and would have addressed the legal and financial scenarios. Life insurance can also ensure that the beneficiary of the deceased owner gets paid in full and in cash immediately. Many times, without life insurance, the income derived from the business declines because one of the individuals who performed a good portion of the work is no longer there, or because additional staff must now be hired to replace that person. Either way, the beneficiary may not get paid -- either in full or on time -- if future earnings will be needed to fund the buyout. Life insurance can prevent that from happening. The second major use of life insurance in business is key person. Businesses insure tangible things like the building from fire and destruction, the equipment, and liability losses, yet many do not insure the most valuable asset and, really, the only one that brings in income: the key employees. Key person life insurance works like this: The business buys coverage on the key employee. The business owns the policy, pays the premiums, and is the beneficiary. If the key employee dies, the business receives the death benefit proceeds to help replace either the income that key employee was generating or the key employee him/herself. Beyond buy-sell and key employees, as businesses become more successful and move past just surviving, the owners tend to look for additional benefits or rewards for themselves and the employees. This is where salary continuation comes into play. Salary continuation (sometimes referred to as “Golden Handcuffs”) says basically this: IF you continue to work until age 60 or 62 or 65, the business will continue some set salary starting after retirement. And IF you should die before retirement, the business will pay that same salary continuation to your beneficiary starting at time of death. And finally, some businesses purchase life insurance for certain employees and let the employees name the beneficiary. This can be done as a straight bonus plan or as a split dollar plan, in which the business and the employee share the premium expenses. In summary, life insurance can be used to protect your clients’ businesses from dying when one of the owners does. It is a proven method both for ensuring the business absorbs the death of a key employee and for rewarding select employees. For help with your business owner clients’ insurance needs, |
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