Using Life Insurance to Ensure Business Continuity
One of the first things any business owner needs to consider is how to protect against events that may threaten the future of the business.
Life insurance policies are commonly used to fund agreements for transferring ownership interests in small businesses. They are also used to compensate a business for the loss of a person critical to the firm’s success, such as the founder or chief executive. In some buy-sell agreements, each owner or partner purchases policies on the life of the other owners or partners; in others, the business entity purchases the policies covering each owner.
A business that maintains a key person life insurance policy receives the proceeds upon the insured’s death and applies the funds to the resulting costs, such as recruiting and training a replacement. Designing and funding a plan to help ensure that the business will continue after a change of ownership or loss of a key person requires assistance from financial, legal, and insurance professionals.
The loss of critical personnel can be life threatening to small businesses; however, it's a risk that life insurance can often mitigate. In fact, life insurance policies are frequently incorporated in plans aimed at making it possible for a business to survive a change of ownership or the loss of a partner, the chief executive, or an employee whose creative talent, technical knowledge, or salesmanship drive the business.
Most commonly, life insurance is employed as the funding mechanism in "buy-sell" plans -- legal agreements providing for an orderly transfer of ownership interests -- and to compensate for the loss of a key person.
Consult our qualified financial team to learn more.
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