Why business owners should consider life insurance
Every business owner who has achieved any level of success knows that building a viable company requires dedication, commitment, hard work and maybe even a little luck. For most, it takes years of sacrifice, discipline,and consistent focus; not to mention blood, sweat and tears.
How can you fail to plan for the effective transition of your business; the one thing you have dedicated so much time,energy, heart and soul to? Let us help you ask the right questions and develop your business succession planning strategy.
Why would life insurance help in my business succession plan?
Let’s take a look at four situations where life insurance can solve some pretty big problems that can arise in the succession of a business.
Death of a key person.
The smaller your business, the more critical you’re likely to be to the success of the business. What if you were gone tomorrow? What if another employee – perhaps your most important employee – dies suddenly? Having insurance on the lives of key people in your business will provide cash to the business that could be critical to smoothing over a rough period, or even keeping the business afloat, while the rest of the team looks to find a successor. No wonder many lenders, and investors, require companies to carry key person insurance.
Equalizing an estate.
If you own a business and have one or more children, but not all of them are working with you, you need to consider what would happen if you passed away. It often makes sense to leave the shares of the business to the child, or children, who are working in the business day to day. The reason is that the children who are not working in the business would likely have different objectives; they may prefer to receive dividends from the business rather than see all the profits reinvested each year, while those working in the business may have a different perspective. A better solution may be to leave the shares to the children working in the business and equalize things by leaving the other children cash provided by an insurance policy. The insurance premiums may be a small price to pay to maintain harmony in the family when you’re gone.
Covering taxes on death.
At the time you pass away, you’ll be deemed to have sold, among other capital property, your private company shares. While you may be able to claim the lifetime capital gains exemption, to shelter up to 848,252 of the capital gain if the shares qualify, you could end up paying approximately 25-per-cent tax on any capital gains that a gains that are above and beyond the exemption. How will your executor pay that bill? Life insurance plays an important role in allowing your executor to be able to pay your final tax bill.
Efficient transition of ownership and control of the business.
Smooth transition of ownership is critical to the continued success of the company. When an owner passes, considerable uncertainty can permeate an organization. Therefore, preparation and proper execution of a succession plan can have a huge impact on future success of the business. A business can be dramatically affected in a number of ways if one of the owners is no longer there:
- How is the business going to replace the owners contribution to the company?
- How long will it take to find a replacement? And at what cost?
- Will funds be available to buy-out the deceased owner’s estate? What is their equity interest? What is the value of the company?
When there are multiple shareholders, a buy/sell agreement funded by an insurance policy can answer all these questions and solve many succession planning needs.
Ask yourself the following questions and let’s start the conversation to make sure you have the right succession plan (and coverage) in place today.
- Is there an existing plan in place? When was the last time it was reviewed and updated?
- What are your personal goals? How long do you want to work?
- How are you going to replace income when you retire? How will you maintain your lifestyle?
- What is the business worth? How are you going to get maximum value for the business?
- What is your desire for the business if you died or become disabled?
- Who would manage the company in the short-term? Who would eventually own the business?
- Is the company going to pass to your family members or will the company be sold to a third party?
- If you are a one owner company, does your spouse know anything about the business? Have you communicated to your spouse or key employee what would happen if you died?