Business owners always hope for continuity. They put plans in place for systems and data. But what about human error? No one wants to think about a key owner or executive suddenly passing away. This type of uncertainty can wreak havoc on operations, financial obligations, and stakeholder confidence.
Life insurance for business continuity allows companies to protect and provide for employees and families of deceased loved ones while managing the transition of ownership and keeping the company afloat.
Life insurance is one of the most important tools that business owners have when it comes to planning for continuity. Many of our clients at Bowthorpe & Associates Insurance Producers utilize life insurance specifically for this purpose providing stability during times of uncertainty.
Types of Life Insurance for Business Continuity
Why Life Insurance?
When a business owner, executive, or even revenue-producing member of your team dies, revenue typically takes an immediate hit. Projects may fall behind, vendors may become impatient, and employees may feel uncertain about their future with your company.
While death benefits from a life insurance policy are never meant to “replace” a person, they can provide your company with the liquid funds necessary to help mitigate the many costs associated with losing a vital member of your team.
Without life insurance, your business may need to take money out of savings, accrue debt, or sell off company assets to stay afloat. Let’s take a look at a few of the ways your business can benefit from life insurance.
Key Person Insurance
When a business suffers financial loss due to the death of an important member of its team (owner or employee), that policy is called key-person insurance.
Business owners should consider how the death of certain employees would affect company revenue. Top executives, revenue-generating salespeople, and even some technical employees can fall under this umbrella.
How much insurance is enough? Consider how much you would lose if this person were no longer around. Think about lost revenue, as well as how long it would take to hire and train their replacement.
Some businesses like to use term life insurance for pure “key man” coverage. This provides protection while that employee is involved with the company, but doesn’t necessarily provide for long-term continuity.
Others may look to permanent life insurance as a way to both provide for short-term costs as well as fund a long-term buy-sell agreement.
Operations Criticality
Think beyond key employees. Are there any employees that would be difficult to find a quick replacement for? How long would it take to recruit, hire, and train their replacement?
How much revenue does this team member directly affect? Are there any clients who solely deal with this person? Would losing this individual impact your company’s leadership structure?
How Long?
Consider how long it would take to not only replace this employee from a staffing perspective, but from a revenue generation standpoint as well. Some businesses may choose to only provide coverage for a certain number of years to coincide with the projected “write-off” period.
Buy-Sell Agreements
A buy-sell agreement is a legally-binding contract between co-owners of a business that outlines how a buy-out will occur if one of the owners dies.
Including life insurance in your buy-sell agreement allows the business to easily buy out the owner’s share of the company with the funds provided by the death benefit. No dipping into savings. No selling off assets.
Business owners should work with legal and financial professionals to decide if a cross purchase or entity purchase buy-sell agreement makes the most sense for their business.
Cross Purchase: Each business owner takes out a policy on every other owner. If something were to happen to an owner, the remaining owners would pay for their share.
Entity Purchase: The business takes out a policy on each owner. If one of the owners passes away, the business would use the death benefit to buy that owner’s share.
Continue Cash Flow & Operations
While death benefits are not meant to replace a person, they can be used to provide your business with the funds necessary to continue paying salaries, retaining employees, and completing projects.
Consider basing coverage amounts on operating expenses, hard asset values, outstanding loans, or future revenue projections.
Executive Retention Programs
While it’s rare to see a business offer life insurance as part of their executive retention packages, it can be done. We’ve worked with businesses in the past who have structured executive compensation packages that utilize life insurance to provide for future obligations.
Staff members can participate in arrangements such as deferred compensation plans and split-dollar life insurance arrangements.
Planning Considerations
Qualifying for larger amounts of life insurance can take considerable time if your business has not prepared the necessary documentation in advance.
Submitting financials, business valuations, and personal information about the person you wish to insure can take several weeks, if not months.
Underwriters typically require more detailed information for larger death benefit amounts. This can include corporates financially supporting their executives’ policies.
Since every situation is unique, consider working with a licensed insurance producer who can guide you through your options.
Review Coverage Amounts
As your business grows, your coverage needs will change. It’s recommended that you review your life insurance needs every few years to make sure your policies are properly aligned with your company’s financial capabilities and goals.
Coverage Needs
- Debts
- Payroll
- Operating Expenses
- Projected Revenue Loss
- Value of Business or Ownership Interest
Wrapping It Up
No one plans on their business partner, executive staff member, or revenue producing employee passing away. But if you prepare for the unknown, you can rest easy knowing that your business can withstand the loss of a key individual.
Life insurance for business provides businesses with the capital they need to stabilize their operations while they readjust and plan for the future.
Whether you are looking to protect your business from losing a key member of your team or want to ensure you have a solid buy-sell agreement in place, life insurance can provide you with the funds necessary to keep your business moving forward even in death.
If you have any questions about life insurance for business purposes, don’t hesitate to reach out to the pros at Bowthorpe & Associates Insurance Producers.
FREQUENTLY ASKED QUESTIONS
What is life insurance for business continuity?
Life insurance for business continuity refers to using life insurance policies to provide funds to a business after the death of a key employee or owner. This can help the business continue operating, meet its financial obligations, and manage ownership transitions.
What is key person insurance?
Key person insurance is life insurance policy that a business takes out on an important member of its team. Whether that person is an owner or employee, the company will be the beneficiary of that policy and can use the funds to cover financial losses or find a replacement.
How does life insurance fund a buy sell agreement?
Including life insurance in your buy sell agreement can provide your business with the funds needed to buy out the owner’s share of the company. The death benefit can be paid directly to your business so you don’t have to use company funds.
What type of life insurance is best for businesses?
Term life insurance is best used for short-term scenarios where you need life insurance coverage. Permanent life insurance is best used when you need life insurance coverage long-term and would benefit from the policy’s cash value accumulation.
How often should I review my business’ life insurance coverage?
You should review your life insurance coverage when your business experiences any major changes. This could include growth, taking on new partners, or a change in financial obligations.