How Life Insurance Can Help Protect Small Business Owner’s Asset
Small business owners fail to see the importance of getting insurance to protect their business thinking they don’t need it. However, what they don’t see is the lack of proper planning, insufficient funds, debt, and death among other things that can significantly impact a business and potentially ruin it.
There are plenty of risks that come with putting up a business which is why small business owners need to invest in the right insurance for their company. There are several types of life insurance that are tailored to small businesses. This article will help small business owners plan for unexpected situations so that their company is protected from potential risks that are detrimental to their business.
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Why Do Small Businesses Need Insurance?
Without insurance, small businesses are more vulnerable to risks. In case the owner or an important employee who plays a huge role in the success of the business passes away, your company will suffer the consequences. On the other hand, with the right insurance in place, business owners will never have to worry about these situations when they arise.
Life Insurance Policies for Small Business
While there are many types of insurance available for businesses, five of the most important policies for small businesses include Buy-sell Funding, Business Loan Protection, Key Person Insurance, Funding Capital Gains Tax on a Business at Death, and Split-Dollar Arrangements.
Buy-sell Funding
A buy-sell funding agreement is an important step in the succession planning a business. This plan sets up the next person who will inherit the business owner’s shares or interests in case of premature death. At the same time, it also helps the surviving owners transition during the transfer of title.
Why You Need It
A buy-sell agreement is an important part of business planning. This involves drafting the succession plan which reflects the needs of the people involved. Buying a life insurance policy helps fund the buy-sell agreement, especially when a buyout takes place.
While there are several ways to structure this type of agreement, each method has its advantages and disadvantages. Therefore, the parties should consider the situation. A sudden change of ownership may also incur tax implications on the company. A buy-sell agreement also ensures that the finances can fund the sale and purchase of the business shares of the deceased.
Business Loan Protection
Small businesses may find it challenging to get financing as most creditors often require the owner a loan guarantee. Upon the death of the owner or a key employee, creditors may start pushing back on immediate payments for the company’s debts. This puts the company in a difficult position and may be forced to liquidate the assets if they cannot settle their debts.
In case the business debts were personally guaranteed by the owner, his estate may be held liable for any amount that the company cannot pay. This may result in the closure of the business.
Why You Need It
Purchasing a life insurance policy for the owner and the key executives protects the company from debts. The insurance payouts are generally tax-free and can be utilized to pay any debts incurred by the business. The premiums paid for a business loan protection are non-deductible for tax purposes. However, of the policy was assigned to a restricted financial institution, some parts of the premiums may become deductible.
A life insurance policy specifically for business loan protection is crucial for a business to survive. It can help the company pay debts in the event the owner or a key employee passes away. Setting up a business loan policy in place prevents the business owners and their estate from becoming liable for the company’s debts.
Key Person Insurance
With key person insurance, your business is covered in case a key employee dies. This can refer to business owners or key employees. When putting up a business, the owner and a few key employees are the ones responsible for running the business. This includes investing their time, knowledge, and energy into making sure the business gets off the ground. They are also responsible for building relationships with clients and earning income for the company.
Hence, when one of these key personnel passes away, it can create a financial impact on the company. Clients may stop doing business with you, creditors may ask for immediate payment or competitors may take over a huge chunk of your customers. When the owner dies, it becomes difficult for the company to continue without facing any setbacks.
Plus, finding a replacement can be even more challenging. Losing a key employee disrupts the flow of the business and causes delays. Thus, affecting the financial stability of the company.
Why You Need It
Without key person insurance, the future of the company is at stake. However, setting up key person insurance reduces the chances that may put your business at risk. Therefore, getting a life insurance policy for the business owner and key management is crucial.
If one of the insured dies, the proceeds go to the business and the company can use it as their working fund to be able to address their operating costs as well as cover immediate expenses. The payout can be used until the company gets back to its feet again.
This type of insurance also offers assurance to investors, employees, and creditors, that the business will not close down in the event the owner passes away. The value of the benefits outweighs the cost of insurance.
Funding Capital Gains Tax on a Business at Death
Life insurance policy can be used to fund the tax liability after a death. Once a business owner dies, his assets are disposed and a tax liability takes place usually through capital gains. In case the funds are unavailable for tax liability, the business assets may need to be liquidated which often is priced below the market.
This type of policy provides the funds needed by the company to pay any tax liability resulting from capital gains. It also assists beneficiaries who do not want to sell the property.
Why You Need It
Buying life insurance ensures that the ownership is set to avoid any future transfer of ownership which can result in a disposition that may lead to tax liability.
Split-Dollar Life Insurance
Split-dollar life insurance is a strategy where the policy provides the financial needs of the owner and the other key people in the company. With this agreement, one person funds the other person’s insurance and will become the beneficiary of the death benefit while the other can use the cash value.
Why You Need It
This agreement can be utilized in various ways. The bottom line is the beneficiary of the death benefit is the employer while the cash value will go to the person assigned by the executive. A split-dollar agreement allows the sharing of the cost as well as the benefit of a life insurance policy.
Conclusion
When putting up a business, make sure to include a life insurance policy as part of the process. Small business owners can benefit from having insurance in place to avoid any potential risks and pitfalls that may arise in the future.
It also provides financial security and assurance for all parties involved including the owner, investors, employees, clients, and creditors. This ensures that the business will continue to survive even after the death of the owner or key personnel.
