Business succession planning can be accomplished with life insurance.
In an article on succession planning, Bloomberg Businessweek reiterated a well known fact that "few family businesses survive into a third generation." One of the primary causes of small business failures is improper or nonexistent succession planning. Life insurance is one of the most powerful tools available to small business owners to protect the integrity and foundation of their organization and to ensure that operations will continue even after the death of an important employee or owner.
Instructions
Buy-sell insurance
1. Determine the value of each owner's share of the business. Enlist the services of an independent business valuation company and have your organization analyzed. The valuation report will detail the criteria used in determining how much your company is worth. Divide the total business value between the owners to determine how much each person's portion is worth.
2. Buy permanent life insurance. Each owner must buy a life insurance policy with a death benefit equal to the value of their portion of the business. Permanent life insurance products are usually more appropriate for family businesses in which none of the owners has intentions of leaving.
3. Make the business the owner of the policy. Since the life insurance policies are purchased for business purposes and are designed to benefit the business, the company should be listed as the owner and payer. This arrangement ensures that the policies cannot be modified without the proper consent and involvement of all owners. Additionally, if the business pays the insurance premiums, additional tax deductions may exist that will further benefit the company.
4. Make the business the beneficiary. List the company as the primary beneficiary of the life insurance policy. If an owner dies, the proceeds of the policy will be given to the company.
5. Buy out the deceased owner's interest. Upon the death of one of the company's owners, his or her interest in the business may pass to the spouse or other heirs, who would then gain the same rights and entitlements that the owner had. This may create a situation for the company and the remaining owners that is less than ideal. Proceeds from the buy-sell policy can effectively be used to buy the deceased owner's portion of the business from his or her heirs, allowing the remaining owners to continue operations without the involvement of unfamiliar partners.
Key person insurance
6. Determine the monetary value of a key business owner or partner. Consider his or her involvement in the daily operations and contributions to the continued success of the company. Imagine how the business would suffer financially without the presence of that key person and determine how much money would be necessary to offset decreases in sales and production until a new employee can be hired and trained to replace the decedent.
7. Buy life insurance. Investigate the price of life insurance policies with death benefits equal to your company's determination of value for the key employee. In most instances, the key person life insurance concept can effectively be enabled using term insurance products. Unless the key person is an owner of the company, term insurance should suffice to protect the interests of an executive or salesperson.
8. Make the company the owner of the policy. To prevent unauthorized or unintentional manipulation of the policy provisions that could negatively affect the organization, the business should be listed as the policy owner. With this arrangement, changes could not be made without the written authorization of the company.
9. Make the company the beneficiary of the policy. The intention of key person life insurance is to protect the business from failing after the death of an essential employee. If such an event occurs, the proceeds of the policy will be directed to the company and used to maintain adequate financial solvency until a resolution can be found.
