Business Owner Life Insurance

Life insurance has long been a valuable tool that business owners use to reduce risk and to provide the basic financial foundation for continued success. Most business owners recognize the importance of life insurance and use it to solve many of the problems associated with maintaining and growing a successful company. Some common uses of business owner life insurance include: key man insurance, security for loans, buy-sell agreement funding, asset accumulation and estate planning.

Buy-Sell Agreement Funding and Life Insurance

A buy-sell agreement is a legally binding contract which states that at an owner or partner’s death, disability, retirement or otherwise separation from the company, the individual’s interest in the company must be sold back to the business or to the remaining owners at agreed upon terms. These agreements are crucial for small and closely held companies, as in many cases, the death or disability of a business owner creates a significant financial burden on the business as well as the remaining partners. To limit this potential risk, most buy-sell agreements are funded with life insurance and or disability insurance policies. Depending on the type of buy-sell agreement, see “Types of buy-sell agreements”, the business itself or the individual partner(s) acquires a policy on each owner/partner so that at death or disability the funds needed to “buy out” the individual’s ownership interest are readily available. For more information see, “What is a Buy-Sell Agreement?”

Key Man Insurance for Business Owners

With many small businesses the key man or key employee in the business is the business owner. In these cases, key man life insurance can be purchased on the life of the business owner to protect the company in the event that he/she unexpectedly passes away. With key man insurance, the business owns the insurance policy and pays the premiums and is also the beneficiary. If the business owner dies, the business receives the policy proceeds and can use the funds to hire a capable replacement, pay off debts or simply use the funds to buy time until the businesses assets can be liquidated and the business can be closed. In any event, key man life insurance on the business owner can provide much needed stability if there is a sudden and unforeseen death.

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