Company-owned life insurance is one way to help protect a business from financial problems caused by the unexpected death of a key employee, partner, or co-owner. If the covered individual dies, the proceeds from this type of insurance can help in several ways. Here are some examples.
A buy-sell agreement typically specifies in advance what will happen if an owner or a key person leaves the company, either through a personal decision or because of death or disability. The death benefit from a company-owned life insurance policy can be used to purchase the decedent’s interest in the company from his or her heirs.
If a decision is made to continue the business, there may be a period when operations cease while the survivors develop a plan to move forward. The death benefit can be used to help replace lost revenue or to pay costs associated with keeping the doors open, including rent, utilities, lease payments, and payroll. It may also help the surviving owners avoid borrowing money or selling assets.
If a business owner has family members who depend on the income from a business, which simply could not continue if he or she were suddenly gone, the proceeds from company-owned life insurance could help replace the lost income and help protect the family’s quality of life while they adjust and move on.
The appropriate coverage amount will depend on several factors. It could be a multiple of the business owner’s annual salary or the company’s operating budget. Don’t forget to factor in such details as the cost of hiring and training a successor, where applicable, and any debts that the family may have to repay.
A thorough examination of a business and the related personnel should be conducted before the exact amount of coverage is determined.
Remember that the cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that the individual is insurable. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have contract limitations, fees, and charges, which can include mortality and expense charges.
The loss of an owner can be devastating to a small business. A company-owned life insurance policy may help reduce the financial consequences if such a loss were to occur.