If you're a small business owner, chances are that you've caught yourself more than once dreaming about the future. You may picture yourself hobnobbing with industry leaders, cornering the market with an innovative product or service, or directing the work of hundreds of employees.
There's nothing wrong with this kind of musing - as long as you are willing to invest the time and energy to achieve these dreams. However, entreprenuers often fail to consider a less cheerful scenario: what happens to the business if you die suddenly? Would your business close? Would it be clear who controls the assets? Would your family's interests be protected?
The best way to avoid this troubling uncertainty is to have life insurance for your business - and it may not be optional. Before making a business loan, many banks require the business owner to have a life insurance policy. Typically, it's in the form of term life insurance that covers the cost of the loan in the event the borrower dies. The bank then is the beneficiary of the insurance policy.
Life insurance can provide for the successful liquidation of your financial interest in the business, thereby protecting your heirs. If your employees are scheduled to assume ownership following your death, the insurance policy can be designed to provide funds for the purchase of the business. In addition, the life insurance policy can be used to pay the federal estate taxes on your estate. It can also fund a buy-sell agreement between partners.
If the business is to be sold outright after your death, an insurance policy can provide working capital for the transition period. The availability of a ready source of cash will make the business much easire to sell. Assets are usually discounted during such a sale, so the availability of insurance funds will help your heirs.
A related type of insurance is "key person" (or "key man") insurance, which compensates your company for the loss of an employee who is vital to the business operation. The business would have funds to tide it over in case of any slowdown resulting from the loss, and provide funds to apply to the search for and compensation of the key person's successor. For businesses with multiple owners, each partner should have a life insurance policy to facilitate an automatic buyout of the deceased partner's interests.
You should consult with your family, your attorney, and your insurance agent when putting together a sound life insurance program. If you belong to a professional association, chances are that the association has an affinity program that offers affordable insurance.
Richard Strug
Greater Princeton Area SCORE (Chapter 631)
Serving Mercer and Middlesex Counties
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