How Life Insurance Can Protect Your Business and Family Legacy

By Liam Cassidy, EHD Life Insurance and Executive Benefits Expert

Letting go can be hard, both as a business owner and a parent. You spend the best years of your life pouring your blood, sweat, and tears into building something that you hope will stand the test of time. Naturally, you want to protect that investment of heart and soul. Our nation now faces its largest transfer of wealth since the turn of the century. Whether you’re thinking about your children or the company you helped take its first steps in the world, consider how each will carry on when you retire or pass away. Life insurance for business succession planning—or family succession planning—can make those conversations less stressful and provide peace of mind when facing an uncertain future.

Types of Life Insurance

When the owner of a life insurance policy is deceased, the benefit proceeds from the plan are distributed to the beneficiaries as a lump sum of cash that may be used by those parties however they see fit. There may be as many beneficiaries as the policy owner wishes, with percentage splits that are customizable and can only be altered by the owner themselves. Life insurance comes in many names and forms but always falls into one of three categories; Whole life, term life, or universal life.

Whole life insurance is deceptively simple in nature. Once enrolled in a policy, the premium rate is locked in at your current age and health rating and can never increase. After paying into the policy for over a year, it starts to accumulate cash value based on the premiums invested. This amount accrues slowly over the life of the insured but can snowball quickly in plans with a larger face amount of coverage. Perhaps the most impressive feature of whole life is in its namesake; it lasts the duration of your “whole life”. Because the coverage of this policy is permanent, it’s more costly to purchase life insurance as opposed to term life or universal life insurance.

Term life insurance is similar to whole life only in the sense that you’re paying a premium for a set amount of coverage. Term life lasts a pre-determined period of time anywhere from 5 years to 35 years. The premiums in a term policy can be fixed or subject to increase every few years depending on the product and the insurance carrier. There is no build-up of cash value in term insurance and once the term is expired, so is the coverage. The upside of term coverage is the freedom to insure oneself for larger face amounts at an inexpensive cost and is an excellent means for a business or homeowner to hedge against unexpected risks.

The last form of coverage is what’s known as universal life insurance. Universal life hybridizes the traits of whole and universal life insurance and can be dangerous for those who don’t understand who it functions. There are term and permanent variants of universal life insurance and just like whole life, the permanent types have the option to build cash value. For those with a high net-worth or large estate to leave behind for their heirs, universal life can be a lucrative opportunity to invest in variable or indexed stocks and securities funded by the premiums paid into the plan.

Life Insurance and Buy-Sell Agreements

There are countless business continuity strategies and resources out there designed for asset transfer; however, the most commonly used planning tool is what’s referred to as a buy-sell agreement. These compacts are formed when one or more parties resolve to purchase a deceased owner or stakeholder’s share of the business at an agreed-upon price from their family or estate. If a business owner with a life insurance policy passes away, that immediate cash payout can be utilized by the company or its partners in purchasing the former owner’s controlling share of equity, preventing an unwanted buy-out from an external entity and smoothing the transition period for those left behind. Not just limited to life insurance, buy-sell agreements can be structured through individual disability insurance as well. Disability insurance can be used in the same manner as life insurance, with the difference being living benefits provided if the insured is unable to continue working in contrast to death benefits from life insurance. Often, companies will purchase life and disability insurance on a person crucial to the daily operations or decision-making of the business to safeguard against those uncertain events in life.

What Is Key-Person Insurance?

Let’s say that as a business owner, you have a star employee who manages much of your staff and is paramount to ongoing projects. If that individual were to suddenly become disabled or deceased, your livelihood and that of the employees in your company is now critically at risk. The most effective way to prevent that risk from ever occurring is taking advantage of key-person insurance. This is a highly specialized form of insurance coverage that stabilizes cash revenue should the leader/key-person become incapacitated or pass away abruptly. The proceeds from the plan can then be used to fund recruitment to fill the vacant role, satisfy business loan requirements, or as emergency capital to execute a buy-sell agreement. While policy premiums are not tax-deductible except under strict circumstances, policy cash values will grow tax-deferred and benefit payments are tax-free for the enterprise.

Planning for Your Family and Business Legacy

At the end of the day, we are all looking for ways to keep costs down and leave those we care for better off than they were to start. Now is the time to have those difficult conversations and make the proper preparations for what the future holds, one that’s not just right for you but right for your loved ones and your business.