Life insurance often is viewed as financial protection for your family in the case of untimely death. But these policies also often play a very important role in the business world.
From business partnerships and buy-sell arrangements to business succession plans, life insurance can ensure a stable revenue stream and continuity in the event of the death of a partner, owner or integral employee.
The death of a partner or company owner is a crisis for any organization. Not only does the company lose an important member of its key leadership, but a partner’s death means the company often must pay out the amount of the ownership stake to the owner’s heirs.
For a midsized company that is not fully mature, buying out an owner while simultaneously weathering the loss of a key company leader can be a deeply challenging proposition.
A properly structured life insurance policy can ensure that the company has the money on hand to buy out an owner and continue operation of the company without having to take on more debt.
This is important since a company dealing with the death of an owner or partner is most likely already struggling to replace the revenue that the partner generated.
In buy-sell arrangements among business partners, life insurance policies ensure that even a growing company with limited liquidity can transfer ownership in an orderly manner with the insurance policy payout financing the ownership buyout.
There are many different types of life insurance, and policies can be tailored to a business’ specific needs and desired level of coverage. Businesses should evaluate their maturity, liquidity, ownership structure and business succession plans in determining what type of life insurance policy best fits them.
Finally, some companies take out life insurance policies on key staff members whose identity, vision and skill are an integral part of the company’s success.
“Key person” life insurance protects a company from the financial risk of the loss of a CEO, founder or company visionary. A life insurance policy that pays when a key person passes away can help a company weather that storm and have the needed capital on hand to restructure or reorganize.