Life Insurance

Life insurance is one of the lowest-cost benefits you can offer your employees. For a small additional fee, health insurance providers allow you to purchase a life insurance plan, either from them or from another company. Specialized life insurance options include the following:

• The survivor-income plan provides the deceased employee's family with monthly income.
• Key-employee insurance indemnifies you against losses resulting from the death or disability of a key employee in your firm, including yourself or your partners. By taking out an insurance policy on his or her (or your) life, you (or your beneficiaries) will have ample funds to recruit a successor. To avoid negative tax consequences, ask your CPA to help you decide whom you should name as the beneficiary of your policy.

You might also want to consider taking out a partnership insurance plan on any partners you have. That's because a partnership usually dissolves when one partner dies, unless the partners have provided otherwise with a well-thought-out and adequately financed buy-and-sell agreement. This agreement provides for the purchase of the deceased partner's share of the business at a prearranged price. A partnership insurance plan for two partners is straightforward, as it involves purchasing a life insurance policy on the other partner. Each partner in return pays the premiums.

Where there are three or more partners, it's common to have the company buy a policy on the life of each partner. The trick lies in trying to set up a formula to determine the future value that will be paid by the partners and partners' heirs. The simplest plan sets an arbitrarily agreed upon value for each partner's interest in advance. More complex systems are necessary for small-business partnerships that are growing.

Many banks require a life insurance policy on the business owner before lending any money. Such policies typically take the form of term life insurance, purchased yearly, which covers the cost of the loan in the event of the borrower's death; the bank is the beneficiary.

Term insurance is less costly than permanent insurance at first, although the payments increase each year. Permanent insurance builds equity and should be considered once the business has more cash to spend. The life insurance policy should provide for the families of the owners and key management. If the owner dies, creditors are likely to take everything, and the owner's family will be left without the income or assets of the business to rely on.