Top Tips 2021 – Life Insurance for the Business – Inexpensive Peace of Mind
Article provided by Jason C. Gaynor Investment Services, LLC
Insurance—everyone’s favorite subject. While none of us necessarily enjoy paying for it, when we need it, and it is the insurance company writing us the check, we certainly appreciate the the investment we’ve made in it.
Most of use own life insurance for personal use; to protect our loved ones and their finances in the event of a death sooner than expected. But for business purposes, life insurance tends to be severely underutilized and very misunderstood in terms of where it might be useful for one’s business. To be clear, not every business owner needs to own life insurance for their business—not even close. Here are a few important considerations:
- “If I die prematurely, my spouse will sell this business and my family will be taken care of” This is a great thought, and if your business is in high demand and the phone rings constantly with offers to buy your business, this seems perfect. REALITY: For most of us, if we would like to sell our business, we could likely do so quickly for a fraction of its value. Life insurance provides immediate liquidity to keep the business afloat (perhaps hire someone to replace the owner and their daily duties) so that the business can be sold for 100 cents on the dollar, not 30, 40, or 50 cents on the dollar at a discounted price.
- “I have a business partner and should they die, I am able to buy their share of the business” Buy-Sell agreements are vital to any business with more than one owner. Without them, you could wind up with a new business partner that is not exactly of your choosing. Funding the Buy-Sell agreement is too often forgotten in our business succession plan. If you have significant liquidity and can write a check to your partner’s heir(s), there would be no need to insure this risk. But, if your plan is to borrow the needed funds to purchase your partner’s shares, you might take a look at the cost of borrowing, and the significant financial burden associated with it. Life insurance provides some or all of the liquidity needed to fund the agreement in the event of a premature death; and in most instances, costs far less than a commercial loan.
- “In the event of my passing, I want this business to continue to operate, as it means a lot not only to me, but to my employees” This is the one that so many fail to consider - the impact on employees, and their families. If you have no concerns about your employees and their families, then there is certainly no risk to insure. Or, if your business has significant liquidity and will continue to thrive without you, there is no risk to insure. (If this is the case, however, why do you show up and work everyday?) But, if your business lacks sufficient liquidity to continue operations without you, or funds are needed to hire a replacement for you, then perhaps there is a risk worth insuring.
I have yet to meet anyone who enjoys talking about insurance. Unfortunately, sometimes the insurance industry loves to “sell” and not “advise”. It should also be mentioned that purchasing life insurance is far more cost effective, and qualifying less cumbersome than it was just a few years ago. (For healthy individuals, believe it or not, there is likely not even a medical exam.)
For many of us, once we have the conversation and have some education on the risks, a simple short duration, low-cost term insurance product can be very adequate, and best of all, inexpensive peace of mind.
There are many of us who own a business with little or no need for life insurance—but there are certainly some situations where a brief conversation with your trusted financial advisor can help you to gain some insights on whether life insurance for your business is worth consideration*.
Jason C Gaynor, Wealth Manager offering securities through LPL Financial, Member FINRA/SIPC
* We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.