It’s estimated that small businesses account for 99.7% of US employer firms(1a) and they generated over 11 million jobs between 1993 and 2011(2a). Your business has a large impact on your employees and even your community. It’s vital that you provide a level of protection around your business plan for continuity; it literally may be the most important decision you can make.
Ensuring a smooth transition of ownership or replacing high value key employees is a relatively simple process as long as a funding source like life insurance is present. It protects both your family and the employees of your company from unnecessary risk in times of transition or uncertainty.
Common ways to safe guard your business.
- Consider covering key people you can’t be without with a life insurance policy. Your key people have valuable talents, ideas and training that would suddenly not be available. How much revenue or customers would your business lose?
- Consider setting up a buy-sell agreement and funding it with life insurance. If you own your business with partners, the partners purchase life insurance to help provide a smooth transition of ownership in the event a partner passes away. An unfunded buy sell is something to be avoided at all cost yet remains one of the most common mistakes for many companies.
Can your business survive a retirement, death or disability of an owner or key employee?
Many businesses unknowingly place themselves in a position to be shutdown or highly impaired simply because they failed to do one simple thing, “create a succession plan”.
Succession planning is KEY to ensure the transfer of your valued business or company.
A Failure to Plan is different than planning to Fail! But in the end, the results may be the same!
As a business owner, you may depend on several key people for the seamless operation of your company or business. It is common for a business to be built around the skills and talents of a few key individuals whose energy, capital, experience, or knowledge make them a valuable asset to your organization. How much does your business stand to lose if you can not replace your Key person(s) in a timely fashion?
A key person insurance plan can help preserve the value of a business and assure its continuation when the death of a key person, contributor or stakeholder occurs. Rapid replacement of expertise and knowledge is rarely feasible. An essential person(s) can take time and money and may even jeopardize the continuity of your business.
A key person life insurance policy provides the following benefits:
- Help beneficiaries meet estate tax obligations timely without compromising or being forced to dissolve the family business.
- Assure creditors and customers that the business or company will keep running and operate as usual.
- Minimize the financial impact on the business or company in the event of an untimely death to a key individual by providing life insurance proceeds to find, attract and train a qualified successor.
The policy can even replace revenue you may have lost due to the untimely demise of your valued or key employee.
How Key Person Insurance works: Your business would be the owner and beneficiary, it would also pay the premiums of the insurance policy. Your key employee is the life insured, however, the key employee would receive no benefit from the existence such policy. At the death of the insured, the company or business can use the tax free proceeds for the business succession plan*.
Your insurance professional will work closely with you to make the plan meet your company’s needs and fit your budget!
For a C corporation, the life insurance death benefit and annual increases in cash value may be subject to the corporate alternative minimum tax. THINGS TO CONSIDER:
- Who would run the business in the event of the loss of a key employee or owner?
- What have you done to guarantee your key person(s) will stay with your company?
- Who are the key employees whose death or disability would jeopardize your company, business or profits of?
1a Small Business Office of Advocacy, FAQ, September 2012. www.sba.gov/advocacy/7540/42371 2a Bureau of Labor Statistics. BED. For the latest employment statistics, see Small Business Office Advocacy’s quarterly reports, www.sba.gov/advocacy/10871