4 Things Small-Business Owners Should Know About Life Insurance

For most people, life insurance is a personal matter and is only concerned with providing for their dependent loved ones upon their passing. However, when you own some or all of a small business, life insurance has more far-reaching implications. It is affected by your business and how you set it up affects the business you leave behind.

To help you make the best decisions for both your business and your loved ones, here are four key things to know about life insurance for business owners. 

1. Partnership Agreements May Require Insurance

Are you in a business partnership with one or more other individuals, either relatives or nonrelatives? If so, how does the partnership agreement stipulate the deceased partner's stake should be handled? Many partnerships see each partner's share fall to their designated or immediate heir. However, this person may not want to serve the business in the same capacity — or may not be able to do so. 

One smart move many partners make is to include a formal agreement to buy life insurance on each partner with the organization as the beneficiary. This influx of cash for the remaining partners allows them to buy out your heir and move on with the business. If your partnership agreement doesn't require this already, now is a good time to discuss adding it to the agreement. 

2. The Business Will Have New Expenses

If you play a significant role in the business's daily operations, your death could throw a kink in its operation. Many small-business owners have all the knowledge of running the business in their heads. Their skills or name may also be the primary source of the business’s income. Even if others work with you in the business, it may take some time to get back up to speed if you're not there. 

A business that depends on its owner will face immediate expenses to replace that person. It may need to hire a CEO, bookkeeper, accountant, skilled trade professionals, or temporary workers. It may have to turn down some work if your skills aren't available.

On the other hand, it may not be able to operate at all until a replacement can be found. However, these costs can interrupt operation so severely that the business fails. If the business must go through months or years of probate, these costs often come about before the vast portion of your estate is available to everyone. This is where the immediate, often-nontaxable payout of a life insurance policy will be essential. 

3. Life Insurance Can Pay for Buyouts

Life insurance with the heirs as named beneficiaries can make transfers of business ownership much easier. One reason is that it provides a lump sum of cash that a beneficiary can use to buy out other joint-heirs.

If your business is your largest asset, the only way to achieve an equal inheritance to multiple children may be to leave the business to them as joint heirs. However, some may not want the business. They may also not be able to work together for the business's best interests. What can they do in this case? One solution is to use your own life insurance policy or policies to make the inheritances more equal.

You have two ways to do this. One way is to buy a life insurance policy of equal value to what other heirs would have received from inheriting the business. They can cash in the insurance policy and you may leave the business in whole to the beneficiary who intends to run it. 

Another method is to buy a policy that pays out to the one who wants to run the business. They will then use this policy to buy out their coheirs' stakes and return complete control of your business to themselves. 

4. Whole Life Policies Are an Asset

Although life insurance's primary benefits happen after you pass away, you can also see benefits before then.

For a business owner, the cash value growth of a whole life policy can be an asset throughout the life of the policy. Because self-employed persons often pay more in income tax, for instance, the growth in nontaxable whole life insurance value can help compensate. Moreover, if owned by the business, it adds to the business's book value even before being used. 

Where to Learn More

Could any of these benefits of life insurance policies benefit your business or your heirs in the event of your passing? Are you the manager of a small, family-run business or partnership which could be made more stable with the right life insurance strategy? If so, start by learning more about modern life insurance options. 

Illinois Insurance Center   of Chicago can help. For more than 40 years, we've assisted individuals, business owners, and organizations with all their life insurance needs. Call today to make an appointment or find answers to your specific questions.