Life insurance is the most important insurance coverage a small business can purchase as it pertains to perpetuating the business. (General liability is most important operational insurance coverage). When a person dies unexpectedly, the loss of life often has repercussions beyond just immediate family. This is especially true if the individual was a business owner or a key member of a business.
Some of you are nodding your head saying:
“Yeah, if we lost so-and-so our entire business would be turned upside down. An adequate amount of life insurance would certainly help us bridge the gap between losing so-and-so and hiring/training so-and-so’s replacement.”
You are an enlightened insurance soul. You can skip down to the third section of this article if you like.
Some of you are reading and saying:
“Life insurance is a waste of money. Our business could survive if we lost the owner. He doesn’t do anything anymore, anyway.”
You have some learning to do. Pay special attention to the next section of this article.
Learning About Life Insurance the Hard Way
Let’s say you and your business partner own a successful small business that manufactures retail goods on a regional level and employs 40 people from the surrounding community. You’ve been in business for 20 years and have a solid relationship with your raw material suppliers, your distribution channels and the retail stores that sell your product. Both you and your partner share a common vision for the business, sales are growing, and life is good.
Then you get that awful call. Your business partner has passed away suddenly after a car accident. A few months later you get a call from your late business partner’s spouse asking to set up a meeting to discuss the future of the business.
After a lengthy, emotional meeting, you find out your business partner had racked up mountains of personal debt financing some commercial property deals on the side that didn’t pan out. Your business partner’s spouse, now saddled with that debt, is freaking out and demanding you sell the business to pay the obligations. Now a 50 percent shareholder in the business, the spouse has the legal right to make such demands. Now you either have to spend a boatload of money to buy out the spouse or sell the business you’ve worked 20 years building.
Either way, life is not so good anymore. You wish that you had listened to your insurance professional about purchasing a Buy-Sell Agreement Life Insurance Policy (see below).
3 Types of Business Life Insurance
Individual Life Insurance
- Technically, individual life insurance is coverage for a business owner’s family. What makes an individual life insurance policy important for a business is defense against a distressed sale. Many small business owners take loans out using their personal assets as collateral. When the business owner dies, the surviving family members sell the business to cover the loan obligations. This creates a distressed sale situation where the business might be sold for significantly less than actual value. An individual life insurance policy on the business owner for an amount equal to obligations defends against this type of situation.
Buy-Sell Agreements (solution to scenario above)
- In the simplest terms, a buy-sell agreement is a contract created so a deceased business owner’s share of the business is bought at a predetermined price through life insurance. This is a protection against the deceased business owner’s family members taking ownership of a business they may not have the desire or skills to operate.
Key Person Insurance
- Key person insurance provides the business with cash if a critical leader or revenue-producing employee were to die. There are many unacknowledged costs that come with losing a crucial member of a business. The business may lose clients, contacts or connections that drive revenue. Additionally there is cost to search, hire, and train a replacement. All of these costs add up very quickly, and without the proper life insurance to provide needed cash, the gap between employee loss and replacement can critically injure a small business.
Life insurance is a headache and hard to rationalize spending money on. But the simple truth is that a life insurance policy has the power to change the course of the lives of the people you care about and the business you help build. Your family and your business are important enough to take the time to do the right thing. Your independent insurance agent can help you get the necessary and appropriate coverage.
Good luck and be safe!