As a savvy business owner, you understand the importance of having key person life insurance to protect your company in the event that you — or a partner — unexpectedly passes away. The policy proceeds can be used to pay off debts, hire a replacement, or buy time until a decision about the future of the company can be made. However, you may not realize that business owners like you can use life insurance for a variety of other purposes. Here are some you may find helpful.
Fund a Buy-Sell Agreement
A buy-sell agreement is a legal contract that establishes who can buy an interest in a company and under what conditions they may do so. For example, a company’s shareholders may agree that if one shareholder dies, the company will redeem his or her shares. Or they may agree that the shares will be sold to the surviving shareholders. A buy-sell agreement can ensure that your family and other beneficiaries receive a fair price for your business interest. Life insurance is often used to fund buy-sell agreements.
Help With Your Estate Strategy
If you are like other business owners, the majority of your estate may be tied up in the value of your business. If you were to die without an effective estate strategy, your business could end up being liquidated in order to pay estate taxes. However, preparing ahead of time can prevent this scenario from occurring.
One approach to consider is establishing an irrevocable life insurance trust that would own a life insurance policy on your life. The trustee of the trust is named as the beneficiary of the policy proceeds, which are then used to pay any applicable estate taxes due on your estate after your death. When properly drafted, the trust strategy avoids estate taxation of the life insurance proceeds.
Life insurance is a flexible, multi-use business tool that can serve and help business owners in numerous ways. Ask your financial professional and estate planning attorney to help you determine how life insurance can be useful in your business situation.