By Danny Lerner and David Granowitz, Leavitt Life
As a business owner, you have a lot to think about when it comes to mitigating the risks associated with your operation. There are a variety of solutions that can be employed to protect your business and employees, from property and liability coverage to workers compensation and employee benefits. However, have you considered the consequences to your business in these instances:
- An owner has a premature death or becomes disabled.
- A key employee dies or is seriously disabled.
What are the implications to the ongoing profitability of the business operations?
This article explores these significant areas of exposure and explains how life insurance can be a significant strategy in protecting your business.
Keep the Business Alive – Buy-Sell Agreements
For most small businesses, the death or disability of an owner is a challenging time for both the surviving co-owners as well as the affected owner’s family. These are just a few of the issues that will likely need to be addressed:
- In the case of an owner’s disability, will the family continue receiving income to live on and for how long?
- Do surviving owners understand they may be forced to take on a surviving spouse as an unintended partner, in the event of an owner’s death or permanent disability?
- How will the business be valued if a tragedy occurs to one of the company owners?
- Where will the funds come from to pay for a deceased or permanently disabled owner’s interest in the business?
The solution: An executed buy-sell agreement funded with life insurance.
A buy-sell agreement is an agreement between owners to buy out a co-owner’s share of the business in the event of that co-owner’s death, disability, or retirement. Buy-sell agreements are typically funded with life insurance and disability insurance policies. These policies allow the remaining owners to buy the company interest from a deceased owner’s estate at an agreed-upon price or determinant formula. These amounts or formulas are specified in the agreement, which is typically created with the help of a business attorney. This prudent approach ensures that the business will not have to scramble to come up with the money to buy out the deceased or disabled owner’s interest and that the surviving family members will be fairly and promptly compensated for their share.
Loss of a Key Employee
Most companies have certain “key” employees who are critical to the operations and bottom line of the business. A temporary or permanent loss of these employees would have a detrimental impact on the business.
The solution: Key person insurance which is life or disability insurance purchased by the business on such an employee and payable to the business. These policies can help make up for lost sales or earnings or cover the cost of finding and training a replacement. The amount of insurance purchased is typically a multiple of the employee’s compensation. This also becomes an important issue when the owner’s children are in the business. Can the children effectively continue to run the business if the parent dies? If not, a key person policy on the parent will provide liquidity to maintain the business after the parent’s death.
Please contact your Leavitt Group insurance advisor to discuss these important business insurance issues in more depth.