Life insurance is one of the lowest-cost benefits you can offeryour employees. For a small additional fee, health insuranceproviders allow you to purchase a life insurance plan, either fromthem or from another company. Specialized life insurance optionsinclude the following:
- The survivor-income plan provides the deceased employee’sfamily with monthly income.
- Key-employee insurance indemnifies you against losses resultingfrom the death or disability of a key employee in your firm,including yourself or your partners. By taking out an insurancepolicy on his or her (or your) life, you (or your beneficiaries)will have ample funds to recruit a successor. To avoid negative taxconsequences, ask your CPA to help you decide whom you should nameas the beneficiary of your policy.
You might also want to consider taking out a partnershipinsurance plan on any partners you have. That’s because apartnership usually dissolves when one partner dies, unless thepartners have provided otherwise with a well-thought-out andadequately financed buy-and-sell agreement. This agreement providesfor the purchase of the deceased partner’s share of the business ata prearranged price. A partnership insurance plan for two partnersis straightforward, as it involves purchasing a life insurancepolicy on the other partner. Each partner in return pays thepremiums.
Where there are three or more partners, it’s common to have thecompany buy a policy on the life of each partner. The trick lies intrying to set up a formula to determine the future value that willbe paid by the partners and partners’ heirs. The simplest plan setsan arbitrarily agreed upon value for each partner’s interest inadvance. More complex systems are necessary for small-businesspartnerships that are growing.
Many banks require a life insurance policy on the business ownerbefore lending any money. Such policies typically take the form ofterm life insurance, purchased yearly, which covers the cost of theloan in the event of the borrower’s death; the bank is thebeneficiary.
Term insurance is less costly than permanent insurance at first,although the payments increase each year. Permanent insurancebuilds equity and should be considered once the business has morecash to spend. The life insurance policy should provide for thefamilies of the owners and key management. If the owner dies,creditors are likely to take everything, and the owner’s familywill be left without the income or assets of the business to relyon.
