Business Life Insurance

Why do businesses have life insurance?

Buy/Sell Agreement Funding- When an owner(s) wants to know that their business will continue if they die prematurely, they can put a life insurance policy in place to ensure that money is there to facilitate the transition to a key employee or partner(s) in the business. This agreement funded by a life insurance policy allows for the value of the deceased owner's business interest to be paid to their family in cash and the other business owner(s) or key employee to own the deceased owner's share of the business. Without this plan and the liquidity that life insurance used to fund it providesm there is rarely enough money to pay the beneficiaries of the deceased owner the full value of his/her business interest. The consequence of this lack of action is often times the closure of a business run by a sole proprieter. For a business with more than one owner a new partnership between the surviving owners and the deceased owner's family, although not ideal, must be formed.

Key Employee Protection- When a successful business realizes that the loss of a key employee would be a severe blow to the organization, the business owner(s) may consider putting a key person life insurance policy on the employee. This policy can serve a dual role in protecting the business from the loss of the employee due to premature death or competition. First, if the employee dies prematurely, the death benefit from the life insurance policy can provide fund to search for a replacement for the employee and can help replace lost time and income until a replacement can be found. Second, the policy can provide a golden handcuff for the employee. If a life insurance policy that builds cash value is purchased, the cash value in the policy can be promised to the employee as a bonus if they stay with the company for an agreed number of years. At that time, the employer has a choice. He/She can give the employee the policy itself or an amount equal to the cash value in the policy.

Business Loan Guarantee- When a business takes out a loan to start or expand operations, the lender will often times ask for the borrower to buy a life insurance on their life and assign the lender as beneficiary. These policies are usually term policies that are scheduled to run the length of the loan, but all situations are unique and no one type of policy is appropriate in all situations.

Deferred Compensation Plans- Because of the tax deferred growth of cash value and self completing aspect of the contract at death, many large companies use life insurance as a vehicle for deferred compensation contracts.

If you would like to explore any of these situations, email cdunlevy@arizonagroup.com or call Chris Dunlevy at (480) 633-6683.