Most businesses, particularly those with two or more partners, establish buy-sell agreements mandating that if one of the leads dies or becomes disabled, their share must be sold to the remaining partners.
Such agreements are a pivotal component of doing business in today’s world. The problem, however, is that in far too many instances an efficient funding mechanism is forgotten about and never put into place. Without it, the buyout would have to be shouldered solely by the surviving partner out of pocket, unless he or she is OK with being in business with the deceased’s spouse or children.
The bottom line? By making some simple insurance choices in advance, business owners can cover a multitude of risks.
More than 540,000 businesses are launched every month. Many of them seek trusted partners to help them understand the life insurance options available to them, and how such policies can ensure their comprehensive financial security.
When positioning life insurance for business owners, be sure to discuss the following ways coverage protects your client’s professional legacy.
1. “Key Person” Insurance
These company-owned policies can help protect a business’s revenue when a critical team member credited with driving the success of a business – the “key” person – dies unexpectedly.
In most cases, the company is named as the beneficiary. If the key person passes away or becomes disabled, the policy distributes a benefit to the owner. These benefits are typically tax-free, but the premium is not tax-deductible.
If a business owner passes, the resulting death benefit can be used as working capital while the team attempts to restructure and rehire, covering any related expenses.
In the unfortunate event that closing the business is required, the death benefit can be implemented to pay off debts and fund severance packages.
Key person insurance is meant to mitigate the potential catastrophic loss a key person’s death or disability could cause, including:
- Cash flow interruption
- Costs associated with hiring a replacement
- The loss of the key person’s clients to a competing business
- Negative credit implications
2. Funding a Buy-Sell Agreement
As mentioned earlier, buy-sell agreements are absolutely integral for businesses with more than one owner. These binding contracts dictate the usage of a co-owner’s share of the business in the event of their passing, and aid in mitigating unpleasant financial disputes.
- Life insurance policies are purchased to insure each co-owner.
- Should one of the owners die, the life insurance payout is used to purchase the deceased’s share of the business from the estate.
- Coverages include a cross-purchase agreement, in which business owners purchase coverage on one another, or an entity purchase plan, in which the business purchases the policies and pays all premiums. In the event of a death, the payout is reinvested into the business.
A one-way buy sell agreement, on the other hand, is often used in family owned businesses in which there exists a sole owner who is planning to sell the business to a family member or junior partner.
A life insurance policy taken out on the current business owner is used to fund the one-way agreement. The prospective buyer becomes the beneficiary of the policy and maintains the premiums, agreeing to purchase the business using funds generated by the policy, whether triggered by the owner’s death or retirement. In the latter case, the cash value of the policy would be leveraged.
3. Employee retention and compensation
Permanent life insurance coverage is frequently used by savvy business owners to incentivize talented team members to stay with the company.
A Restricted Executive Benefit Agreement, or REBA, typically involves an executive bonus in the form of premiums paid by the company to a life insurance policy in a valued employee’s name. Colloquially referred to as “golden handcuffs,” the REBA restricts access to the cash value of the policy until the employee becomes fully vested at a predetermined date. If the employee jumps ship beforehand, the money goes back to the employer. However, once fully vested, the employee can leverage the policy’s cash value in any way he desires, including supplementing retirement income through withdrawals, etc.
The Importance of Disability Insurance for Businesses
It is important to note that disability insurance is also critical when it comes to business coverage – both funding buy-sell agreements and securing key person policies. And it is also often overlooked.
Far too many businesses fail to purchase adequate coverage, placing them at tremendous risk. A business partner who is disabled and drawing a check, but not doing their share of the workload, can often be even more detrimental than a business owner who is no longer present.
Key person disability insurance and disability buy-sell agreements can help to ensure a business does not have to shoulder the investment required to replace or buy out a figurehead, mitigating the impact and interruption to continued success.
Your Client’s Business is at Stake
When talking with your clients, it is crucial to keep in mind that most business owners are looking for a partnership, not a sales pitch.
Position yourself as a collaborative advisor while discussing life insurance for business owners. Ultimately, your role should be to share your institutional knowledge while providing essential tools that can help business owners build a stronger model for their company.
Belman Klein can help you provide your clients with this invaluable support.
We regularly assist insurance advisors, helping them to navigate unforeseen underwriting issues. If your carrier refuses coverage for your client, we can assist in locating opportunities with other providers. Most importantly, we never split commissions. We pride ourselves on offering support and assistance in a collaborative environment and can help you identify different approaches to protect your clients’ financial futures. Contact us today and let us know how we can be of help.