Did you know you can use life insurance in creative ways that also help your business? The most common ways to do this include key person life insurance (sometimes called "key man" life insurance) and buy-sell agreements. Here's a little bit more about both of them, along with three other ways to protect your company and your employees.
Key Person Life Insurance
A key person life insurance policy covers your business if that key employee or partner dies. Your business purchases and owns the policy, as well as receives the death benefit. That death benefit can be used to cover any of your business's expenses, from lost profit to the cost of replacing the employee or partner.
Another way to insure against the death of a business partner is with a buy-sell agreement. For example, let's say three partners in a business each own the same amount of stock. One partner, Mr. Clark, dies, and his stock goes to his wife through his will. If the business had written a buy-sell agreement and funded it with life insurance, the surviving partners would have received a life insurance benefit when Mr. Clark died. The partners and Mrs. Clark could then have exchanged the life insurance benefit for the company stock. This keeps the business in the hands of motivated, qualified people.
Split-Dollar Life Insurance
Split-dollar life insurance is another benefit you can offer your employees while investing in your company. Here, your business purchases a life insurance policy on an employee. Together, you share the policy's cost. If the employee passes away, your business receives an amount equal to the premiums paid, and the employee's beneficiary receives the remaining death benefit. If the policy is surrendered for any other reason, your business receives the cash value.
Deferred compensation is another way to use life insurance in a way that benefits both your employees and your company. In this situation, your company buys a life insurance policy for a key employee. Your business is both the owner and beneficiary. If the employee dies, your business receives the death benefit tax-free. From the benefit proceeds, your business pays an annual sum to the employee's survivors for a specified period of time.
Group Life Insurance
Providing group life insurance as an employee benefit can also help your business by attracting and retaining quality employees. Group insurance is less expensive to purchase than individual insurance. Also, no medical exam may be required, depending on the size of your company. In this case, the premiums are tax deductible for your business, and any death benefits that get paid out go directly to your employee's beneficiary.
If you own a small business, don't underestimate the many ways life insurance can protect you, your employees, and your family. Don't let all your hard work go to waste. Having a solid business succession plan ensures your company can meet and overcome challenges like death, disability, or your retirement.