Business Insurance Solutions
Protecting Your Business Interests
Life insurance plays an integral role in the structure and financial planning of any long term business enterprise. It is most common forms include key person insurance, buy/sell agreements, business loan protection, and the funding of capital gains tax on a business upon death.
Could your business survive if you were disabled, or would you be forced to sell your business or take other measures to meet financial obligations? Use our business expense calculator to help determine the monthly business expenses you need to cover to help maintain profitability (such as salaries, rent, utilities, property taxes, etc.).
Key Person Insurance:
As a business owner, you may rely on a number of key people for the successful operation of your company. Many businesses have been built around the strengths and skills of a few individuals whose capital, energy, knowledge, or experience make them a valuable asset of the organization.
In the event of death or extended illness of such a key person, your business could suffer from the loss of knowledge, expertise and management capability. Replacing such a valuable resource is often difficult and costly in terms of finding and training someone new, as well as meeting their income requirements.
Key person insurance is a life insurance policy maintained by the company on the life of an important partner or employee. It provides funds to partially offset the economic cost to the company of losing such an employee. It may also provide:
1. A stabilizing factor to keep the business running.
2. Reassurance to creditors to keep credit channels open.
3. A death benefit to the family of the deceased for a reasonable period of time to replace lost income.
Make key person insurance part of your business plan. Talk to a business advisor to find out about the types of policies and different options available.
If you are a partner in a business or a major shareholder in a company, you should consider drawing up a buy/sell agreement. This type of agreement sets out provisions for what will happen to the partnership or company in the event of the death or disability of a partner or major shareholder.
For example, you may want to set up an agreement requiring the surviving partners to buy out the shares or interests of the deceased/disabled partner. In this case, the estate of the deceased/disabled partner would be obliged to sell to the surviving partners.
A life insurance policy is a fundamental part of buy/sell agreements because the policy can provide immediate funds to the surviving partners to buy out the deceased or disabled partner.
Other advantages of buy/sell agreements that are funded by a life insurance policy include:
- Heirs obtain a definitive value for the deceased partner’s interest.
- Surviving partners obtain total and unrestricted ownership of the business.
- The longer the policy is in force, the greater the cash surrender value, which can be used to take advantage of other business opportunities.
To learn more about how to structure a buy/sell agreement and make it part of your overall business plan contact an advisor today.
Business Loan Protection
It can be difficult for small business owners to obtain adequate debt financing as creditors will often require personal guarantees a loan. The death of the business owner or another key executive may cause creditors to demand immediate repayment of outstanding business debts.
This can place a significant burden on the business and force the liquidation of key business assets at fire sale prices at a time when business results may already be severely impacted by the death.
In addition, if the business owner has personally guaranteed the debts incurred by the business, the owner or the owner’s estate may be liable for any outstanding debts that the business is unable to pay.
A solution is for the business to purchase an insurance policy on the life of the business owner(s) or other key executives. It can help a business to negotiate loans and repay business debts with tax-free life insurance proceeds when a a business owner or another key executive dies.
Business loan insurance will ensure that all business debts will be fully repaid upon the death of the owner minimizing financial risks for heirs and to permit the business to continue free of debt.
Funding Capital Gains Tax on a Business at Death
Life insurance can also be an effective way to fund the tax liability that arises at death. An individual who owns shares in a corporation, a partnership interest, or business assets (as in the case of a sole proprietorship) will be deemed to have disposed of these properties at death.
As a result, a tax liability may arise in the form of capital gains and recaptured capital cost allowance. If funds or other assets are not available to pay the tax liability, the shares or partnership interest may have to be sold, or business assets liquidated, possibly for a price below the fair market value.
Life insurance can provide the funds needed to pay the tax liability that results from the capital gains and recaptured depreciation triggered by an individual’s death.
It is a valuable funding vehicle if the beneficiaries want to retain the property or if the market conditions will not provide the estate with an amount equal to the fair market value of the property. The policy could be owned individually or by the corporation or partnership and dispersed to the individual’s estate after death.
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