To ensure the livelihood of the company, the money can be used to pay off debt and keep creditors at bay, find a replacement for the deceased, buy out the deceased's shares in the company (buy-sell agreement), or even help to supplement the income of the deceased's family.
The founder or owner of a business shouldn't immediately be considered the right or only candidate for a key man life insurance policy. Rank is less important than who the critical employees in your business are. Your business couldn't function day to day without the founder, but it also may not be able to survive without your revenue-generating sales team or without the precious relationships a business development employee has with your vendors.
If you still think you and your employees are invincible and key man life insurance isn't for you, you may be forced to reconsider. Oftentimes investors and lenders will insist you purchase a policy to protect their own investment. Another reason to consider? Policies are very affordable.
How does it work? Contorno and Company, Inc appraises the person you want to insure and sets a premium on that person. The premium is based on the current health of the employee, his (or her) health history, age, and salary.
Structurally, many key life insurance polices are set up as permanent polices that build cash value over time. However, a smaller business can opt for a more affordable term life policy where premiums are paid until the employee retires or leaves the company, and then it can be transferred to that key person's replacement.
In general, coverage ranges from matching the key person's base salary to as high as 15 times his salary - or it can be a flat amount.
It's not fun to think about, but key man life insurance is an affordable way to ensure the future of the business these critical employees you're insuring have worked so hard to make successful.
Quick Tips
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Business-continuation plan.
Let us help you put together a plan detailing how your business will function without key employees.
Disability key man life.
Your business could suffer just as much if a key employee becomes disabled. Disability key man insurance
policies help protect this risk.
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Business Succession Planning
Many people have worked most of their lives to build closely held businesses. This effort usually creates a high level of satisfaction, as well as significant wealth for the family. One of the goals of building a family business is that it may be passed on to the next generation with a minimum of tax and family problems. However, problems often arise, because of the failure to think ahead about tax issues and the differing interests that family members may have.
Our experts work with families to plan the transition of business ownership, while protecting the older generation and insuring a comfortable retirement. Using shareholders' agreements, special compensation arrangements, insurance planning and family financial counseling, we can help to preserve family businesses to the second and third generations and beyond, while working to minimize the tax liabilities arising from such transfers.
Owning a business means living with uncertainty. Many business owners, however, have reduced that uncertainty and bolstered their family's financial security by having Buy-Sell Agreements prepared for their businesses.
What Is A Buy-Sell Agreement?
It's a legal document, drafted by an attorney, to provide for the smooth succession of your business upon the occurrence of a specified event. The agreement spells out the terms under which a designated co-owner, employee, heir and/or other party will buy your interest in the business if you die, retire or become disabled. The intent is to help ensure that the business continues and, most of all, that your beneficiaries receive the fair market price, in full, for your interest in the business.
Who Needs a Buy-Sell Agreement?
You may if, as a sole proprietor, partner or co-owner of a closely held business, you:
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Want the business to continue if you die, become disabled or retire.
Have a partner, family member, or valued employee able and willing to take over the business.
Have a spouse or other heirs whose financial security you want to ensure. |
How Does it Work?
You and your successor(s) enter into a legally binding contract, commonly called a Buy-Sell Agreement, drafted by an attorney. Under the terms of the agreement, when specified events occur (such as your death, disability or retirement), the successor(s) purchase your interest; the agreement generally includes the actual purchase price or provides a formula for determining the price.
Most Buy-Sell Agreements also identify how the agreement will be funded. Funding helps ensure that funds will be available to carry out the terms of the agreement and the purchase. While there are several funding options -- sinking funds, loans, installments--insurance on the owner's life is one of the most popular options, since it helps ensure that beneficiaries will receive the agreed upon price for the business.
Why Should I Find Out More?
A Buy-Sell Agreement helps protect the interests of your successors, as well as beneficiaries not involved in the business. When life insurance is used as a funding medium, it provides the necessary cash for an immediate buyout. Additionally:
| The full amount of proceeds is available when it is needed most, whether next year or decades from now. |
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Proceeds are income-tax free in most instances*.
The cost of scheduled premium payments is predictable.
In cases when you have a policy that can accumulate a cash value, that value accumulates on a tax-advantaged basis. These cash values may be available to be used to help purchase a buy-out at retirement*. |
A Buy-Sell Agreement at Work
Bob and Jeremy landscaped together as equal partners for 10 years. Their business was valued at $500,000. Both men have families with no interest in the business. They recently met with their attorney to draft a Buy-Sell Agreement calling for one to buy the other's share at a specified price if one dies. They also purchased $250,000 insurance policies on each other's lives. If Bob dies, Jeremy receives $250,000 in insurance proceeds which can be used to purchase Bob's share of the business from Bob's widow. Jeremy gets the business, and Bob's family gets the agreed upon price for his share.
* Consult your tax advisor.
As with every line of coverage we implement, we represent many different carriers to assist us in providing this coverage. Our experience has shown that no one carrier is the perfect solution for everyone. Comparing plans from the top providers in the market place ensures that we get you the best coverage for the lowest cost. Please email or call us or request a quote below.
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