Using life insurance in business succession avoids ‘fire sale’

In the event of the untimely death of a business owner, key person insurance for small or large business owners can provide a critical component to a business continuing on in the future.

In the event of the untimely death of a business owner, key person insurance for small or large business owners can provide a critical component to a business continuing on in the future.

To protect your business, your family, and business partners, you can implement a buy/sell agreement that specifies what happens to the interests of a deceased business owner.

You can purchase life insurance—rather than use personal funds or business assets, to fund the buy/sell agreement.

If an uninsured person dies without key man insurance in place, the business may have to be sold at a “fire sale” price.

Many partners sign a legal agreement to buy one another out during life. But if one partner dies unexpectedly, there may be no guarantee the other partner has the financing in place, to cover the cost of the business they have built together.

Building a successful business takes decades.

The solution is a life insurance policy on the business owner or on a sole proprietor.

The company takes out the policy, and pays the premiums.

Upon death, the life insurance policy proceeds are paid into a capital dividend account.

On a sole proprietor, if the premiums are paid from after tax dollars, the death benefit is paid out on a tax free basis to the named beneficiaries.

Small companies are often dependent on the expertise of a few top people.

If one of these individuals passes away, how will he or she be replaced? How long will this take?

What happens if a business owner dies and has not prepared a will?

It can take years for the remaining business owners and the deceased’s family to come to an agreement.

Legal fees can eat up a substantial amount of the business profit.

The deceased’s family may realize their wealth is still in the business, with no immediate income and they have other financial concerns to consider.

The deceased’s family needs money as their income earner has passed away, and the business partner needs money to replace the deceased partner.

Mom and Pop businesses may worry about taxes due on the sale of their business; other families want to leave an equal legacy for each of their children.

One child who has spent his or her lifetime involved in the business will inherit the business with valuable equity, and the parents also want to leave a legacy to their other children.

The most affordable option to consider is life insurance.

Planning for the loss of a business owner or partner is crucial for a business to continue as intended, and to protect the financial security of the families of each partner or co-owner.

Using life insurance in business succession is the most affordable way to protect against the catastrophic loss of losing a business owner.

The structure of the buy/sell life insurance should be specific to the objective of the business owners.

It takes approximately 30 days for a life insurance policy to pay out the lump sum chosen.

It provides very affordable piece of mind.

Doreen Smith is a Certified Financial Planner and insurance advisor with Capri Wealth Management Inc.


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