Life Insurance In The Business World
Business life insurance plays a number of important roles in the business world, benefiting business owners, employees and family members. GDI Insurance Agency, Inc. offers comprehensive business insurance, including key person insurance. Contact us today for your free quote 1-209-634-2929.
Business Continuation
The loss of a business owner or key employee can seriously damage a small business or even result in the business closing its doors. Advance planning can help cushion the impact of such events.
- Death of a business owner: If a business owner dies, a buy-sell agreement can provide a smooth transition of total ownership and control to those who will keep the business going. For a corporation, a stock-redemption agreement may be used to ease the transfer of the deceased owner’s shares to the surviving shareholders. Life insurance is frequently used to fund these types of agreements.
- Key employee insurance: Life insurance on the life of a key employee helps to cover the costs of finding and training a replacement, as well as meeting any monetary obligations to the deceased employee’s survivors.
Key Employee Insurance
The untimely death of a key employee or a business owner who is also a key employee can have a disastrous effect on a business. Some of the “costs” of such an event might include the following:
- A weakening of the company’s credit rating
- The financial cost (in time and money) to find, hire, and train a replacement
- The distraction of other employees, causing lack of production, lower quality, bad morale and more conflicts.
- A need for cash to fulfill promises made to the deceased’s spouse or family, such as deferred compensation or salary continuation.
- The inability to grow the business, because cash reserves are being used to hire and train new employees.
- The loss of confidence for employees, suppliers and customers.
Additional Issues If Key Employee Is An Owner
- Disagreements between the heirs and the surviving business owners or key employees.
- Lack of cash to buy the interest of a deceased owner, requiring a sale of the business to an unknown, outside third party.
- Surviving owners may be forced to work with someone who is either not competent or not motivated enough to make the business thrive.
- The business may have to be sold to the pay estate taxes.
Estate and Survivor Financial Needs Planning
Life insurance also plays a significant role in estate and survivor needs planning:
- Group term life insurance: Group term life insurance can be provided to the employees of a business, with premiums generally much lower than individual term life policies. Generally the first $50,000 of such coverage is tax-free to the employee.
- Executive life insurance: An employer can help fund employee-owned, individual life insurance policies for selected executives or key employees through either a “bonus” plan under IRC Sec. 162, or as a part of collateral assignment spit-dollar arrangement.
- Death benefit only plan: A Death Benefit Only (DBO) plan is a form of deferred compensation plan plan. In a DBO plan an employee defers a portion of his or her compensation. No benefits are payable during the employee’s lifetime. At the employee’s death, the deferred compensation is paid to the employee’s named beneficiary, with the entire benefit being taxed as ordinary income.
GDI Insurance Agency, Inc. Your Trusted Insurance Broker
We specialize in providing Life Insurance solutions. Contact us at 1-209-634-2929 for your quote today!