Using life insurance for business succession provides liquidity to the business, partners or co-owners to pay for the costs associated with losing someone at the top of the organization.
Business succession is a fancy term for making sure your business and your family will survive the death of an owner, executive, top sales person or yours.
Your business faces many risks for which may already have commercial insurance: property, crime, general and cyber liability, etc. The death or disability of a key person in the business is another risk. Its implications can range from the loss of sales, to the cost of replacing an executive, buying the deceased’s share of the business, legal costs. etc.
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Life insurance in business can be used in two main forms, key person insurance and as a buy-sell agreement funding tool.
Key Person Insurance
This policy would be owned and paid for by the business, which would also be the beneficiary. This is under the premise of the business as an entity having an insurable interest on the life of the insured.
Upon death, the proceeds of the life insurance policy would go to the business. This influx of cash will provide the liquidity to compensate for lost revevue due to down time, finding a replacement, legal costs and buying the share of the business from the the deceased’s family.
The same principle applies to disability insurance, which protects against the disability, not the death, of a key person in the same way.
Life Insurance For Business Succession To Fund Buy-Sell Agreements
A buy-sell agreement, also as known as a buyout agreement, is the prenup of the business world. It is an agreement between co-owners, partners and the business on what will happen to the business in the event of the death, disability, leave of a partner or co-owner.
If your partner dies unexpectedly, you are then in business with your deceased partner’s spouse and/or children; as they have a legal stake in your business. A life insurance policy provides the funds to buy them out.
The same principle can be used in the event of a disability, which can be even more devastating than a death because of the added medical and care costs of a disability.