What Are The Benefits Of Business Owner Life Insurance?
Life insurance has been an invaluable tool used by business owners to reduce risk and create a sound financial foundation for continued success
. Many business owners understand the importance of business insurance and use it to solve various problems associated with the maintenance and growth of a company. However, many businesses overlook the intrinsic benefits of life insurance. There are several common uses for business owner life insurance such as key person insurance, loan security, buy-sell agreement funding, asset accumulation and estate planning.Key Person Insurance For Business Owners
For a small business the key person is the business owner. Key person life insurance can be purchased to protect the company against the business owner passing away unexpectedly. The business is the policy owner, the business pays the premiums and is the beneficiary. As the beneficiary the business will receive proceeds from the policy to hire a capable replacement, pay off debts or to fund the company until the business assets can be liquidated and the business closed.
Life Insurance As Loan Security
Liquidity is the most important thing for the growth of small businesses. However, small businesses often lack money to fund expansion and therefore will need to borrow money from Banks, government agencies or private investors. Most lenders and investors will not part with funds without some kind of guarantee. Term insurance can be purchased as surety against the loan. The business is the policy owner, pays the premiums and is named the beneficiary. Once the key person policy is effective, an agreement is signed giving the lender first rights to the policy proceeds in the amount of the outstanding loan balance due. The business then receives the remainder of the proceeds.
Buy-and-Sell Agreements Ensure Business Continuity
A buy-and-sell agreement is a legally binding contract between the owners of a business entity. The buy-and-sell agreement obligates the owner(s) on their deaths, disability, retirement or otherwise separation from the company to sell the individuals (s') interest to the survivors or company and likewise committing the survivors or company to purchase the individual's (s') interest. Death or disability can create a severe financial burden on small businesses. The potential risk can be mitigated by funding the buy-and-sell agreement through life insurance or disability insurance policies. Depending on the type of buy-and-sell agreement either the business or the individual(s) acquire the policy for each owner so that the funds needed to buy out the individuals ownership interest are readily available.
Asset Accumulation For The Small Business Owner
Life insurance can be used as an essential tool to protect businesses but a smart business owner also uses life insurances as a vehicle to accumulate cash and future retirement income. The unique combination of death benefits and tax advantages are only available in life insurance products. The advantages include tax deferred growth, potential for tax free policy cash access via withdrawals and policy loans, and policies are protected from creditors making them effective tools for business owners to grow their assets. However, a portion of income earned from policy maturation is subject to capital gains tax by law. Properly structured life insurance has become a legitimate option for smart business owners to grow wealth. The type of life insurance policy to use depends on the desired objectives of the business or business owner.
Estate Planning For Business Owners
For many business owners the majority of their estate is tied up in the value of the business. Effective estate planning that includes business succession planning is essential to protect the business against closure or liquidation to pay estate taxes. Life insurance provides the liquidity business need to pay estate taxes when the business owner passes away. An irrevocable life insurance trust can be setup to own the life insurance policy of the business owner(s). The trustee (usually the beneficiary) is able to use the proceeds in the trust to pay the applicable estate taxes.
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